Real Estate Trends in 2021: Where are we going?

Why were home sales so strong in 2020 and what can we expect in 2021?

The great thing about 2020 is that the year is over and done. Between a pandemic, business closings, massive levels of unemployment, huge fires, and several major hurricanes the year has been a disaster. And yet – strangely – 2020 is also one of the best years on record for residential real estate. Sales were up, home prices soared, and mortgage rates reached historic lows.

For investors, the big question is why did real estate do so well in 2020? Much of the answer largely involves four factors: millennials, historically-low mortgage rates, a severe lack of inventory, and government policies involving forbearance, evictions, and foreclosures.

Millennials

Millennials – those aged between 24 and 39 – now total about 72 million people, roughly 22% of the population. They’re generally finished with school and in the workplace. Millennials are socializing and forming households. They don’t want to live with Mom and Dad (you can pretty much bet that lots of Moms and Dads agree), but for many their plans have been put on hold.

“The coronavirus outbreak has pushed millions of Americans, especially young adults, to move in with family members,” said the Pew Research Center in September. “The share of 18- to 29-year-olds living with their parents has become a majority since U.S. coronavirus cases began spreading early this year, surpassing the previous peak during the Great Depression era.”

“Millennials are a potent source of demand, which has been postponed by job losses associated with the pandemic” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and real estate data. “As the economy comes back in 2021 look for a large number of millennials to enter the housing market, creating additional demand.”

The residential market in 2021 and beyond will reflect another reality. Millions of people now work from home. They no longer commute and yet businesses function. Going forward they’ll be looking for larger homes, properties with bedrooms, baths, and one or more home office spaces.

Mortgage rates

The year 2020 produced historically low mortgage rates. In the first week of the year, according to Freddie Mac, the typical 30-year mortgage was priced at 3.72%, a rate that fell to 2.67% by mid-December.

It might seem as though such low rates are a product of the pandemic and its related economic slowdown but the general interest rate decline is not new, it’s a continuation of a long-term trend – a very long trend. Annual mortgage rates in recent years look like this according to Freddie Mac.

  • 2019 –   3.94%
  • 2009 –   5.04%
  • 1999 –   7.44%
  • 1989 – 10.32%
  • 1979 – 11.20%

Interest rates in general have been falling for a very long time.

“Today, we live in a low-interest-rate environment, where the cost of borrowing for governments and institutions is lower than the historical average,” explains the Visual Capitalist. “It is easy to see that interest rates are at generational lows, but did you know that they are also at 670-year lows?”

What will happen to mortgage rates next year?

We don’t know what the future will bring but it’s hard to ignore the huge amount of cash sloshing around. Depositors added more than $2 trillion to US bank accounts in the first half of the year and interest rates fell to historic lows. A lot of cash worldwide – more than $18 trillion according to Bloomberg – is now invested with negative interest rates. If investors could do better with equivalent risk would not rates be higher? The sense here is that 2021 will continue to reflect lots of supply and relatively not much demand. If that’s the right analysis then lower rates loom ahead.

What about inventory?

One reason for fast-rising home prices is the lack of inventory. According to the National Association of Realtors (NAR), in October total housing inventory stood at 1.42 million units, a record low.

A sudden increase in the available stock of properties for sale seems unlikely. The pandemic has introduced uncertainty into the marketplace, one reason for increased savings. Millions of people worry about jobs and credit. Replacement properties in the same market have also seen higher pricing.

One strategy that may become more attractive for current owners is a move from a high-cost area to places less expensive. In California, for example, the state government reported a net migration loss of 135,400 people during a recent one-year period.

Without more available inventory – supply – most areas are likely to see generally rising prices during the coming year.

What will the government do?

We don’t know how the incoming Biden Administration and new Congress will handle any number of leftover policy issues.

  • What will become of the .5% adverse market refinance fee that started December 1st? It applies to loans bought by Fannie Mae and Freddie Mac, a fee passed on to borrowers in the form of higher costs.
  • What happens when the federal eviction ban ends? If the government fails to act millions of households could potentially face dislocation while at the same time large numbers of properties held by small investors could become distressed and available at a discount.
  • Will the Federal Reserve continue to have the emergency powers it used at the start of 2020 to flood the country with money and preserve much of the economy? There is an effort on Capitol Hill to constrain the Fed.
  • What will happen with Fannie Mae and Freddie Mac? Will they be privatized? Will just-proposed liquidity standards be allowed to stand? Such standards would instantly raise mortgage rates.

What happens in Washington is the wild card and there’s no experience to help with the situation we have today. Keep your eyes on DC – that’s where the housing market in 2021 will largely be determined.

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