Housing Market Predictions for 2021: Will Real Estate Be the Same?

Editor’s note: All of HomeLight’s coronavirus information for buyers, sellers, and agents is available on our COVID-19 hub.

As of April 22, 2020, the CDC has confirmed there have been 802,583 confirmed cases of Americans infected with the coronavirus, and 44,845 Americans have succumbed to the virus. No matter where you look, we are reminded that we are experiencing something that will go down in the history books.

The coronavirus has thrown the real estate market (and every other industry) for a loop, and it’s hard to realistically make housing market predictions for 2021. Right before the pandemic gripped the nation and shelter-in-place orders were released, the real estate market saw 5.27 million in sales, which is 8.5% lower than February’s sales — and Lawrence Yun, the chief economist at the NAR predicts it could drop another 30% to 40% in the upcoming months.

What does that mean for someone needing to buy (or sell) a home amid the pandemic? Should you wait until things even out, or would it be better to dive into the market now?

Choosing the right time to dive into the housing market is going to depend on a variety of factors. Let’s take a look at what factors will play a significant role in next year’s housing market predictions.

A closed sign in 2021.
Source: (Tim Mossholder / Unsplash)

Housing market predictions for 2021: Factors to consider

Factor #1: The real estate market

Spring is the time of year where everything traditionally comes back to life, and the real estate market is no different. Historically, the spring months are the best months to list a home for sale, but with the nation in a semi-state of limbo, interest in buying or selling amid the pandemic has dwindled. Mortgage applications have dropped by 17.9%, and some regions have seen a 70% decline in new houses listed on the market.

The National Association of Realtors surveyed 89,813 members in April 2020 to gauge the impact this virus would have on the market. In the survey, 44% of agents reported their clients have postponed the homebuying process by a few months, and 22% have said their clients stopped looking because coronavirus-related job security was a concern.

Real estate and unemployment

Unemployment is a big concern for the real estate market. In just three weeks of the pandemic taking full effect in the US, more than 26 million Americans have filed for unemployment. Although the government created and passed the CARES Act to provide $2 trillion in economic assistance for the American population, the $1,200 one-time stimulus check isn’t going to provide long-term relief.

Because there are fewer people buying houses due to COVID-19, it’s not surprising that people are taking their homes off the market. Some sellers are taking homes off the market because they are hesitant to allow people to walk through the house for showings. Others are reluctant to sell because they don’t know if they’ll be able to find a new home of their own.

“Over the years, there’s been a housing shortage for new and existing homes — particularly now in light of the COVID-19 pandemic.” Shari McStay, a top-selling real estate agent who specializes in relocation clients, downsizers, move-up buyers, and first-time buyers in Massachusetts, explains.

Factor #2: The economy

Earlier in February, HomeLight surveyed the nation’s top agents, asking them for insight regarding market-related trends. Many agents who responded felt 2020 was off to an incredible start: 71% of agents reported that their market was a reliable seller’s market, and 94% of respondents said that low mortgage interest rates attributed to the increased buyer activity in their market. Sixty-two percent even said bidding wars were happening more frequently!

Americans are concerned that the coronavirus will cause a recession similar to what we experienced in 2008. The International Monetary Fund (IMF) suggests the coronavirus pandemic will trigger a global slowdown as bad as (or worse than) what we experienced 12 years ago.

2008 recession

Many factors contributed to 2008’s recession, but the primary cause was the ripple effects from lenders who doled out subprime loans to unqualified applicants. Because subprime mortgages usually have adjustable interest rates, introductory low-interest rates enticed consumers to apply for these loans without realizing or factoring in that their loan interest would increase over the life of the loan.

This caused a significant increase in mortgage payments that homeowners couldn’t continue to pay. As a result, when home values dropped, many homeowners found themselves owing more on their homes than those homes were worth, and as a result, homeowners started to default on their loans because the values of their home dropped significantly. Along with increased foreclosure filings (2.8 million foreclosures were filed by 2010), there was an abundance of newly constructed homes that people couldn’t afford.

To boost the economy and avoid falling into another recession, the Federal Reserve has made an emergency rate cut, which reduces interest rates by 0.5%. In essence, the new interest rate benchmark rests between 1% and 1.25%.

This was the first time the Fed made emergency rate cuts since 2008. Though the stability of the housing market is uncertain, mortgage rates will fluctuate, but it’s highly probable that rates for a 30-year fixed-rate mortgage will stay around 3% or lower.

2020 mortgage requirements

Unlike 2008, mortgage lenders are tightening their eligibility requirements to reduce the number of foreclosures filed in the future. Before the Great Recession, the Financial Crisis Inquiry Commission believed that lending standards should have been increased to avoid collapse. But because lenders didn’t change those standards, the housing market crashed and home prices fell 22% between March 2007 to October 2010.

Whether you want to invest in real estate or buy your dream home, you’re going to have to meet minimum mortgage requirements first. Most notably, mortgage lenders have increased the minimum credit score needed to be eligible for a loan. Before, lenders offering VA, USDA, or FHA loans would work with applicants with low credit scores (580 and below). However, some lenders have increased the minimum credit score by 100 points or more.

Not only must applicants meet the minimum score requirements, but some lenders are also now requiring a down payment ranging between 10% to 20% of the purchase price and reducing the debt-to-income ratio for some buyers seeking a loan.

A woman using a computer to predict the housing market in 2021.
Source: (Christin Hume / Unsplash)

Factor #3: Buyers’ personal finances

Mortgage lenders are less likely to approve loans if a buyer’s job history is questionable. Therefore, it shouldn’t be a surprise that job security is a concern many buyers have right now, and rightly so. More than 26 million jobs have been lost since the start of the coronavirus crisis, and the numbers don’t seem to be slowing down. In a Gallup poll, 25% of employed Americans are afraid they’re going to be out of a job within a year.

Applying for a mortgage loan right now is a game of chance. If you’re an essential worker, the chances of being laid off at this time are relatively slim, and if you meet all other requirements, you’re likely to be approved. However, If you’re a non-essential worker and you’re laid off, don’t count yourself out yet.

Janice Egan, an agent in Syracuse, New York, who sells homes 55% faster than the average Syracuse agent, says, “If someone is laid off and they are rehired after this is over, or if they find another job in the same field, a bank is likely to approve them.”

In addition to proof of income with a stable job, buyers are going to want to have a nice chunk of change set aside in a savings account. How much do they need? Well, that will depend on the required down payment, day-to-day living expenses, and monthly debt payments.

Egan recommends bringing at least 10% of the purchase price to the closing table, which will go toward the down payment and closing costs. On top of that, lenders want to see that buyeres have ample savings to cover emergencies. We recommend saving at least enough money to cover three months of bills. This figure includes mortgage and car payments, insurance payments, utilities, debt payments, grocery money, and other expenses.

Suppose you have a secure job, a decent credit score, and enough money in the bank. Ask yourself if it would be in your best interest to buy a house now or if you can wait until next year (or later).

  • Do you plan on staying in the house for a significant amount of time, or do you plan on moving in the not-so-distant future?
  • What are the advantages to buying a house and moving right now? Mortgage rates are low, sellers might be eager to negotiate with serious buyers, and a lot of renters are realizing that living in a rented house doesn’t bring a sense of safety or security, which is more important than ever to some buyers.
  • What are the disadvantages to buying a house and moving right now? Services are limited in a lot of areas, and so is home inventory. Even if you’re financially stable, there’s a lot of uncertainty around the economy. And the logistics involved in touring homes for sale, closing on a house, and moving during a pandemic might be too daunting to make the payoff worth it for you right now.

Housing market predictions for 2021 review

It’s almost impossible to make reliable housing market predictions for 2021. Everything depends on how much longer the nation must deal with the coronavirus pandemic and how quickly the economy is able to recover from the blow.

However, Egan remains hopeful: “There will always be buyers out there who want to buy a house. Even during the 2008 recession, I had plenty of buyers who were looking for homes and needed to relocate.”

McStay adds, “Some analysts say that toward the end of the year, the housing market will be a key driver in economic recovery, and we anticipate this to be the case.”

Header Image Source: (Michael Tuszynski / Unsplash)

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