US Housing Market Forecast 2021: Will It Crash or Boom?

17 Feb 2021 9:34 AM | WiscoREIA (Administrator)

US Housing Market Forecast 2021: Will It Crash or Boom?

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Here are the latest housing market predictions and forecasts for 2021 & 2022. The global pandemic shattered the world order and the US economy suffered its biggest blow since the Great Depression in the second quarter. It has been roughly one year when it put the housing market on hold for several months last spring. Back in March of 2020, the real estate market looked to be headed into a steep decline due to widespread stay-home orders.

Since then, homebuyers, supported by low-interest rates, have kept the housing market afloat. The pandemic has certainly affected every sector but residential real estate has been very resilient. The real estate sector has also been highly supportive of the economic recovery of the country. It has emerged as a pillar of support for the economy. 2020 was a record-breaking year for the US housing market.

The typical U.S. home was worth $266,104 in December, up 8.4% (or $20,587) from a year ago. A total of 5.64 million homes were sold in 2020, up 5.6% from 2019 and the most since before the Great Recession, according to Lawrence Yun, NAR’s chief economist. Sales also rose 0.7% from November and 22.2% year over year. Existing home sales reached the highest level in 13 years.

The 2021 housing market will continue to be super-competitive for home buyers. The market trends in January 2021 show that home buyers will face a competitive spring season as inventory remains low. House prices in all the major local real estate markets continue to rise. The housing market is becoming harder for home buyers. The demand is really high, and the supply and inventory are deficient.

According to economists and market watchers, home values are growing at their fastest pace in a generation, and are showing no signs of slowing down in 2021. Buyers have to face more competition and act more quickly than usual to snag their dream home. That's how hot the real estate market has been throughout the pandemic. Although millions were laid off or furloughed it didn’t prevent house hunters from buying homes across the nation.

As a result, the housing market saw the highest pace of sales growth since the height of the unprecedented housing boom in 2005. That expansion was driven by negligent lending in the subprime mortgage market and the current housing boom is driven by the intense demand and record-low mortgage rates. Both of these factors were driven by the coronavirus pandemic.

Housing prices had already started rising before the pandemic arrived but the pandemic created a rapid acceleration in double-digits. The housing market has seen record-breaking growth since June after briefly put on hold during the outbreak of the pandemic this spring.

As prices keep climbing month-over-month, it just shows the resilience of the US housing market in the face of an ongoing economic recession. Despite looming economic uncertainty, highly controversial elections, and the aggravated spread of the pandemic, home buyers continue to quickly snatch up the relatively few homes listed for sale.

The pandemic has really knocked down homebuilders' ability to fill the housing supply as they are running out of land. The housing market has already been running too short of previously owned homes. The number of homes for sale has plummeted and remained down around 30 percent of what it has been in recent years — leaving the market with nearly twice the demand and two-thirds of the supply.

Both the inventory of homes and mortgage rates are now at their historic lows. The months’ supply of existing homes for sale has fallen to 1.9 months, the lowest level since the series began in 1999. With inventories this tight, it is unlikely that existing home sales can continue to rise at last year's pace, which means there could be a little slowdown in existing sales throughout 2021. ESR Group expects home sales to rise 3.8 percent in 2021.

The rise in remote work has also sparked a new suburban boom and the scarcity of developed land means that builders could be unable to meet the rising demand and home prices would continue to rise in 2021. One thing that has been talked about a lot is that suburban housing markets are booming because of outbound migration from cities. The pandemic has caused some homebuyers to search for homes in a different area than originally planned.

Various surveys indicate that interest in rural areas and suburbs is up and interest in urban areas is down. However, Zillow published an exhaustive study examining every conceivable housing-market data point related to cities and suburbia to see if there are major divergences that suggest an urban-to-suburban migration trend.

According to that study, suburban housing markets have not strengthened at a disproportionately rapid pace compared to urban markets. Both region types appear to be hot sellers’ markets right now – while many suburban areas have seen a strong improvement in housing activity in recent months, so, too, have many urban areas.

Nevertheless, the pandemic has increased the desire for houses with a bit more space and a garden. Couple that with record-low interest rates, and prices are rising dramatically all over the country from urban-to-suburban markets. 

Housing Price Forecast 2021: The Pace of Appreciation is Steady

For now, there are no indications that price growth is going to slow. Zillow Economic Research predicts that home values will increase by 3.6% in the next three months until Feb 2021. Another forecast of theirs is that annual home value growth will rise as high as 13.5% by mid-2021 and for home values to end 2021 up 10.5% from their current levels.

The current forecast also calls for sales volume to remain elevated in the coming year, finishing 2021 at 6.9 million sales, the most since 2005. In previous forecasts, the company predicted a 4.8 percent increase in home values between August 2020 and August 2021. The current extreme demand that is reflected in sharply rising prices, can be attributed to the pent-up demand for home purchases from the March-July period when a great part of the country was in total lockdown.

The housing sales and prices have stayed strong through the fall and winter months amid increasingly short inventory and high demand. Existing home sales also show the tightest housing market on record. The demand has not gotten significantly shorter since last May/June, and buyers and sellers are continuing to connect at a record pace. December existing-home sales rose 0.7% from November.

This trend shows that the housing market is as strong as it was during the housing bubble. It is nowhere too close to a level where you can imagine the balance real estate market conditions. Speedy home sales continue in all regions of the country and the median sales price continues to have double-digit growth. The flow of buyers and sellers has remained abnormally high in the entire fall season.

Not only the housing demand but the supply of new listings has also reached the highest point since the onset of the pandemic. Although sellers are listing more & more homes we need more new home supply to add to inventory and slow these sharp price increases.

As was expected, real estate activity was much better this holiday season compared to last year. Realtor.com’s January 2021 housing data release shows that listing prices continued to increase at double-digit rates compared to last year, fueled by buyer demand, which also continued to snap up homes at a rate almost two weeks more quickly than last year. Whether this momentum can be sustained depends on more inventory becoming available as well as any movement in interest rates, which are expected to slowly tick up in 2021.

  • National inventory declined by 42.6% over last year.
  • The inventory of newly listed properties declined by 23.2% nationally and by 17.3% for large metros over the past year. 
  • The January national median listing price was $346,000, up 15.4% compared to last year. Large metros saw an average price gain of 10.9% compared to last year.
  • Nationally, the typical home spent 76 days on the market in January, 10 days less than the same time last year. 

This January, the national inventory of homes for sale has reached a new low. Homebuyers may need to prepare for a competitive season with lower inventory (especially in more affordable price categories), continuing growth in asking prices in response to strong buyer demand, and slowly rising interest rates. Buyer demand remains far more recovered than supply and continues to grow.

With supply-constrained and demand boosted, house prices seem to rest on solid foundations for next year. They are likely to hold up even if there is a decline in transaction activity in the coming months. This steadiness suggests despite improvements in the trend of new sellers, the current trend gives no relief to buyers because it would not slow down the price growth.

Steady declines in active inventory especially in the face of an improving new listings growth trend suggest that buyers are quickly putting offers on homes. The housing market continues to favor sellers. With high interest from buyers and a limited flow of new listings, the total active listings have been lagging from the previous year.

Homes are being sold at an increasingly fast pace when compared to the previous year. The typical home spent 76 days on the market this December, which is 10 days less than last year.

As new inventory comes on to the market. they are quickly taken out of the market from heavy buyer competition. Therefore, housing units are still in short supply with unsold inventory sitting at a 1.9-month supply at the current sales pace.

Housing Affordability Crisis in 2021

Housing Affordability is driven largely by the gap between household income and home value. It is influenced by the balance between housing supply and demand, the labor market, and mortgage rates by way of Federal monetary policy. Housing is affordable when the housing of an acceptable minimum standard can be obtained and retained leaving sufficient income to meet essential non-housing expenditure.

The most commonly used indicator in the US and many other countries is the ratio of house prices to incomes or earnings. A higher ratio indicates relatively more affordability. A ratio of 100 indicates that median-family income is just sufficient to purchase the median-priced home. Ratios above 100 indicate that the typical household has more income than necessary to purchase the typical house.
Therefore, low-income households spending a high proportion of their income on housing may and vice versa.

The combination of intense demand and the low mortgage rates has pushed home prices to levels that are making it difficult to save for a down payment, particularly among first-time buyers. While we still face economic and health challenges ahead, it is no doubt that the nation will continue to recover from this pandemic and an improving economy will continue to prop up the housing market competition. Industry experts believe the housing market will remain strong and is set to break more records in 2021.

Various national surveys (which you can read below) show that consumers are eager to spend more on housing in 2021, as the economy continues to slowly recover from the pandemic. Strong growth is expected in 2021 for housing sales, rents, and home prices. A report from the Federal Reserve Bank of New York found that the median household expects to increase their spending by 3.7% in the next twelve months, the most optimistic outlook since 2016.

This time the housing market is largely being driven by two factors: a shortage of available housing inventory and extremely low-interest rates. Double-digit annual growth in both list and sale prices show an extreme lack of inventory and incredible demand — A sign of a seller's real estate market. The housing market is still hot, but we may be starting to see rising home prices hurting affordability unless the mortgage rates continue to decline in 2021.

Mortgage rates have risen slightly from the trough seen in early January, but they continue to be historically low, which should support mortgage demand. Mortgage applications decreased 4.1 percent from one week earlier, according to data from the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey for the week ending February 5, 2021. The Refinance Index decreased 4 percent from the previous week and was 46 percent higher than the same week one year ago.

Mortgage rates have increased in four of the first six weeks of 2021, with jumbo rates being the only loan type that saw a decline last week. Despite some weekly volatility, Treasury rates have been driven higher by expectations of faster economic growth as the COVID-19 vaccine rollout continues,” said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 2.97 percent from 2.94 percent, with points increasing to 0.36 from 0.29 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week. Despite house mortgage rates being less than 3%, housing affordability has decreased because the effect of lower mortgage rates (for buyers) is being evened out by double-digit home price growth.

In 2021, mortgage rates are expected to stop dropping. Rather, the National Association of Realtors expects rates to average 3.1% and the Mortgage Bankers Association says mortgage rates will average 3.3% in 2021. These rate estimates are both up from the 3.0% mortgage rate average in 2020 but lower than 2019 average rates.

The combination of rising mortgage rates and increasing home prices will accelerate the decline in affordability and further squeeze potential home buyers during the spring home sales season. Mortgage rates have increased in four of the first six weeks of 2021. Expect mortgage rates to continue to hover around record lows. The Federal Reserve has reassured that it will keep interest rates and its bond-buying program unchanged — downplaying any urgency to bring borrowing costs back up from their lowest levels in history at near zero.

According to Bankrate’s latest survey of the nation’s largest mortgage lenders, as of Feb 15, the average 30-year fixed-mortgage rate is 2.86 percent, an increase of 1 basis point since the same time last week. A month ago, the average rate on a 30-year fixed mortgage was higher, at 2.89 percent.

At the current average rate, you’ll pay principal and interest of $414.09 for every $100,000 you borrow. Compared to last week, that’s $0.53 higher. A year ago, the 30-year fixed-rate, was 3.70 percent, so you would have paid $460 each month for the same amount. The average 15-year fixed-mortgage rate is 2.34 percent, down 1 basis point since the same time last week. Monthly payments on a 15-year fixed mortgage at that rate will cost around $659 per $100,000 borrowed.

According to Realtor.com, the median listing prices grew at 15.4 percent over last year to reach $346,000 in January, notching 25 consecutive weeks of double-digit price growth. This growth rate is higher than December's growth rate of 13.4%. With demand still high and supply still limited, this path seems unlikely to change in the coming months. 2021 real estate market is predicted to remain sizzling hot affecting housing affordability.

So, for now, we have a median price of $346,000 and a 30-year fixed mortgage rate of 2.860%. Assuming a buyer provided a 20% down payment, the principal and interest payments on the mortgage would have been $1,146 a month.

Contrast that with December 2019, when the median price was $299,995 and the average interest rate on a 30-year mortgage was around 3.58%, according to Freddie Mac. A buyer faced a payment of $1,088, or $58 less a month than what he is paying now. Assume that builders and sellers had met buyer demand, keeping prices flat over the year.

Lower mortgage rates would have resulted in a monthly payment of $993, or a savings of $95 a month as compared to a year before. As you can see, low mortgage rates help but don't eliminate the risk of affordability crunch that the housing market could still face if home prices continue to rise at a rapid pace.

Buying a home in a seller’s market can feel like you’re losing money. You may just wait a few months or even a year so that prices will flatten (or come down). The problem is that prices could keep rising to the point where you’re priced out of the market. There’s no guarantee either way.

Therefore, we feel this is the right time to buy your dream property or you can opt to refinance at today’s rates to at least cut your monthly mortgage payments. The present scenario makes it appealing to buyers who have been spending all this money on rent.

Housing Market and Mortgage Delinquencies 2021

Record-low mortgage rates and shortage of inventory are keeping the US housing market strong concerning buyer demand. Prices have been surging month-over-month breaking new records. The government’s moratoria have effectively stopped foreclosure activity on everything but vacant and abandoned properties. 2020 ended the year with a near-record number of seriously delinquent loans, but historically low levels of foreclosure activity.

There is a backlog of foreclosures building up due to this moratorium and no one knows how big that backlog is until after the government programs expire. The foreclosure backlog comprises three types of loans — loans that were in foreclosure before the government's moratoria; loans that would have defaulted under normal circumstances; and loans that would default due to job losses induced by the pandemic.

To help borrowers at risk of losing their home due to the coronavirus national emergency, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac (the Enterprises) will extend the moratoriums on single-family foreclosures and real estate owned (REO) evictions until February 28, 2021.

It will give relief to more than 28 million homeowners with an Enterprise-backed mortgage. The foreclosure moratorium applies to Enterprise-backed, single-family mortgages only. The REO eviction moratorium applies to properties that have been acquired by an Enterprise through foreclosure or deed-in-lieu of foreclosure transactions. The current moratoriums were set to expire on January 31, 2021.

Per the last three extensions, the FHFA said it will continue to monitor the effect of coronavirus on the mortgage industry and update its policies as needed. Currently, FHFA projects additional expenses of $1.4 to $2 billion will be borne by the Enterprises due to the existing COVID-19 foreclosure moratorium and its extension.

Mortgage delinquencies improved in December 2020 but 2020 ended with 1.7 Million more seriously delinquent homeowners than at the start of the year, according to the latest data released by Black Knight.

  • Despite the year-over-year increase, the national delinquency rate saw a modest improvement in December, falling by 3.9% from November to 6.08%, the lowest level since April 2020
  • Serious delinquencies (loans 90 or more days past due) also improved, falling to 2.15 million from 2.19 million the month prior
  • Even after months of improvement, 90-day default activity rose by more than 250% (+2.6 million) overall in 2020
  • Foreclosure starts fell by 67% from the year prior and the year’s 40,000 foreclosure sales (completions) represented an annual decline of more than 70%
  • Starts and sales have hit record lows as moratoriums and forbearance plans protect distressed homeowners from facing foreclosure in the wake of the pandemic
  • Prepayment activity rose by 12% in December, ending the year 112% higher than the same month in 2019 and highlighting a still-strong refinance market entering 2021

ATTOM Data Solutions, licensor of the nation's most comprehensive foreclosure data released its Year-End 2020 U.S. Foreclosure Market Report. The report shows that foreclosure filings (default notices, scheduled auctions, and bank repossessions) were reported on 214,323 U.S. properties in 2020, down 57 percent from 2019 and down 93 percent from a peak of nearly 2.9 million in 2010, to the lowest level since tracking began in 2005.

Those 214,323 properties with foreclosure filings in 2020 represented 0.16 percent of all U.S. housing units, down from 0.36 percent in 2019 and down from a peak of 2.23 percent in 2010. The report also includes new data for December 2020, showing there were 10,876 U.S. properties with foreclosure filings, up 8 percent from the previous month but down 80 percent from a year ago.

Bank repossessions decrease 95 percent since their peak in 2010. Lenders repossessed 50,238 properties through foreclosure (REO) in 2020, down 65 percent from 2019 and down 95 percent from a peak of 1,050,500 in 2010, to the lowest level as far back as data is available — 2006.

States with the highest foreclosure rates in 2020 were Delaware (0.33 percent of housing units with a foreclosure filing); New Jersey (0.31 percent); Illinois (0.30 percent); Maryland (0.26 percent); and South Carolina (0.24 percent).

Rounding out the top 10 states with the highest foreclosure rates were Florida (0.23 percent); Connecticut (0.22 percent); Ohio (0.21 percent); Georgia (0.19 percent); and Indiana (0.18 percent).

Metro areas with a population greater than 1 million that had the highest foreclosure rate, were, Cleveland, Ohio (0.34 percent); Chicago, Illinois (0.30 percent); Baltimore, Maryland (0.29 percent); Philadelphia, Pennsylvania (0.29 percent); and Riverside, California (0.28 percent).

New Single-Family Housing Construction Trends

The NAHB gets input from builders on how confident they are in the housing market based on buyer behavior, sales, and incorporates any forecasts as well. The building permits have rebounded from pandemic lows and builders are racing to fill the gap between supply and demand.

Rising material costs led by a huge upsurge in lumber prices, along with a resurgence of the coronavirus across much of the nation, pushed builder confidence in the market for newly-built single-family homes down three points to 83 in January, according to the latest NAHB/Wells Fargo Housing Market Index (HMI). Despite the drop, builder sentiment remains at a strong level.

All three major HMI indices fell in January. The HMI index gauging current sales conditions dropped two points to 90, the component measuring sales expectations in the next six months fell two points to 83 and the gauge charting traffic of prospective buyers decreased five points to 68. Looking at the three-month moving averages for regional HMI scores, the Northeast fell six points to 76, the Midwest was up two points to 83, the South fell one point to 86 and the West posted a one-point loss to 95.

The decline in homebuilder sentiment in January and the sharp drop in new home sales in November suggests that single-family starts may decelerate in the near-term from the current impressive pace. The demand for home purchases remained strong in mid-January, as purchase mortgage applications hit a 12-year high.

“Despite robust housing demand and low mortgage rates, buyers are facing a dearth of new homes on the market, which is exacerbating affordability problems,” said NAHB Chairman Chuck Fowke. “

“While housing continues to help lead the economy forward, limited inventory is constraining more robust growth,” said NAHB Chief Economist Robert Dietz. “A shortage of buildable lots is making it difficult to meet strong demand and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability.”

New Residential Home Sales: December 2020

Sales of existing home sales are at an all-time high but new home sales have also risen during the pandemic. Those sales are allowing builders to raise prices. Buyer traffic is converting into sales at a record rate. According to Urban Land Institute, real estate market conditions and values in the U.S. are expected to rebound in 2021 and trend even higher in 2022, with single-family homes outperforming other sectors such as commercial, retail, hotel, and rental.

New single-family construction starts will fall slightly to 871,250 in 2020 before rising to 940,000 in 2021 and 975,000 in 2022, the highest level since 2006. In the meantime, home prices will grow an average of 4.1% over the next three years, above the long-term average of 3.9%, according to the report, based on a survey of 43 economists at 37 leading real estate organizations.

An estimated 811,000 new homes were sold in 2020. This is 18.8 percent (±4.3 percent) above the 2019 figure of 683,000. Sales of new single-family houses in December 2020 were at a seasonally adjusted annual rate of 842,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.6 percent (±15.8 percent) above the revised November rate of 829,000 and is 15.2 percent (±17.2 percent) above the December 2019 estimate of 731,000.

The median sales price of new houses sold in December 2020 was $355,900. The average sales price was $394,900. The seasonally-adjusted estimate of new houses for sale at the end of December was 302,000. This represents a supply of 4.3 months at the current sales rate.

New Residential Home SalesCourtesy of Census.gov

Till the time coronavirus pandemic exists it will lead to a see-saw recovery with ups and downs. Let us discuss in detail the various housing indices & their predictions for 2021 & 2022. We have updated this article with the latest housing market report from various credible sources like Realtor.com (check reference section).

National Multifamily Housing Trends

The multifamily industry continues to face steep challenges brought in by the pandemic. The federal government has included $25 billion as rental assistance in the recently passed COVID relief package. The National Multifamily Housing Council (NMHC)’s Rent Payment Tracker found 88.6 percent of apartment households made a full or partial rent payment by January 20 in its survey of 11.6 million units of professionally managed apartment units across the country.

This is a 2.5 percentage point, or 294,224 household decrease from the share who paid rent through January 20, 2020, and compares to 89.8 percent that had paid by December 20, 2020. These data encompass a wide variety of market-rate rental properties across the United States, which can vary by size, type, and average rental price.

Reference: www.noradarealestate.com

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