What lies ahead for the housing market in 2021?
Following a year full of surprises, many organizations in the real estate industry expect a “return to normal” during 2021. In 2020, the historically busy spring buying season was disrupted when the pandemic was declared in mid-March, with a large portion of the year’s sales activity shifting to late summer and fall. It is likely that the normal seasonality of home sales activity will return in 2021.
There was a great deal of uncertainty surrounding the housing market when the pandemic disrupted the global economy in March 2020. The immediate impact was declining sales activity in April and May, followed by a strong rebound in June and in every month since. Since June, homes sold in fewer days and for significantly higher prices as buyers competed with one another in a market characterized by very low inventory. The housing sector has performed quite well since the beginning of the pandemic, especially when compared to other industries, many of which are still struggling to recover.
Mortgage rates are still very low compared to historical norms, even if they rise somewhat over the next year. Additionally, a large number of Millenials are nearing their early thirties, when family formation and home buying usually occur. This favorable demographic trend enhances the solid fundamentals of the housing market, setting the stage for another year of home sales growth.
Note: The percentages shown above (with the exception of mortgage rates) represent the year-over-year growth/decline forecast by the organizations mentioned above.
Existing Home Sales
The momentum of the housing market is expected to continue into 2021. Four of the six organizations predicted rising existing home sales activity in 2021 when compared to 2020. The Mortgage Bankers Association predicted the strongest year-over-year increase at 11.2%. The National Association of Realtors, Realtor.com, and the National Association of Home Builders all had forecasts in the upper single digits range (6-9%). Fannie Mae and Freddie Mac were the only two to forecast declines, which were slight at -0.1% and -1.6% respectively. Averaged together, the six organizations forecast growth of existing home sales nationwide at 5.3%.
Sales Prices of Existing Homes
Home price appreciation is expected to cool off somewhat in 2021. Rising sales prices in 2020 could motivate homeowners to list their properties for sale, providing needed inventory relief. Also, the availability of a vaccine has the potential to bring some potential sellers off the sidelines. Realtor.com has the strongest expectations for median sales price growth at 5.7%, followed by Fannie Mae at 4.1%. The Mortgage Bankers Association forecasts the weakest sales growth at 1.1%, but all 5 organizations are predicting rising sales prices in 2020, but at lower rates than 2020, averaging 3.3%.
New Home Sales
Demand for new homes was especially strong in 2020, led by a desire for more housing space due to more time spent at home. That trend is expected to continue into 2021, but expectations for new home sales vary considerably even though all organizations listed above expect to see increasing sales activity from 2020. The National Association of Realtors has the strongest expectations, forecasting a 23% increase. The National Association of Home Builders is considerably more conservative, forecasting a slight increase of 0.1%. The other organizations fall somewhat in between, with the Mortgage Bankers Association at 14.4% and Fannie Mae at 6.2%. Averaged together, the four organizations predict that new home sales will rise by 10.9% in 2021.
Sales Prices of New Homes
In somewhat of a surprise, sales prices of new homes have grown at slower rates than existing homes. That trend is expected to continue in 2021 with Fannie Mae forecasting growth of 3.9% and the Mortgage Bankers Association 0.5%, resulting in an average of 2.2%.
Single Family Housing Starts
Another pandemic-driven trend that is expected to continue is elevated levels of new home construction. Housing starts are up 10.4% year-to-date in the United States and up 12.3% in the South region. Gains have been driven by a demographic shift towards the suburbs and historically low mortgage rates that enhance borrower’s purchasing power. The momentum is expected to carry over into 2021 with Fannie Mae (17.1%) and the Mortgage Bankers Association (15.3%) forecasting significant growth. Realtor.com is a little more conservative, forecasting a 9% increase. The most conservative forecast, surprisingly, comes from the National Association of Homebuilders who foresee a modest gain of 1.8% year-over-year. Averaged together, these 4 organizations predict that housing starts will post a significant gain of 10.8% in 2021.
It is difficult to underestimate the impact that very low mortgage rates (less than 3% for well-qualified borrowers in late 2020) have on overall housing activity. Although rates are expected to rise somewhat during 2021, the increase is slight, relatively speaking, and rates will continue to be historically low. Fannie Mae, with a forecast of 2.8% for 2021, was the only organization to predict that rates stay below 3%. The Mortgage Bankers Association forecast calls for rates rising to 3.3%, Realtor.com forecasts 3.2%, the National Association of Homebuilders forecasts 3.13%, and Freddie Mac with 3%. Averaged together, these 5 organizations predict that rates will rise somewhat but stay historically low, averaging 3.09%.
Note: The Center’s Alabama Residential Sales forecast will be released in January 2021.