Better’s 2021 housing market predictions

In the before times, the real estate market followed observable trends. Key market drivers were interest rates, the economy, government policies, and demographic shifts. Then 2020 happened and the COVID-19 pandemic turned everything on its head. The spring peak buying season had a hard stop and we spent weeks watching tumbleweeds from our windows. Then the housing market bounced back. Stronger. Than. Ever. 2021 is shaping up to be another one for the books. The year began with record-low housing inventory, low interest rates that are set to rise, and unprecedented competition for homes. Let’s take a deep dive into what you might see.

2021 housing supply will pick up but only gradually

Housing inventory is at an all-time low

2020 saw the national housing inventory fall below 700,000 for the first time on record—a decline of 36% over the previous year. Companies’ work from home policies had created higher-than-usual housing demand. People living in more expensive cities found themselves untethered to the office and discovered opportunities to buy larger, more affordable homes further afield. Yet for the most part, the pandemic prompted homeowners to hunker down and invest in renovations instead of listing their homes on the market. This left 2021 with exceptionally low inventory to ring in the new year.

Typically there is a seasonal decline in demand for homes before the end of November, which is evidenced by the length of time homes spend on the market. However, demand did not slow significantly and homes were snapped up at record pace. December 2020 saw the typical home spending just 65 days on the market—almost 2 weeks less than the same time period the year before. This surge in sales caused unsold inventory to hit an all-time low. If home sales continue at the current rate, the country’s housing inventory will run out in a little over 2 months.

Competition for homes in the winter months is a consistent barometer of housing demand for the year ahead. Although competition encourages more sellers to list existing homes, a much greater supply of new homes is necessary to dull the sharp price increases that the housing shortage is causing.

New construction will ease the pressure on inventory

As prices for existing homes continue to rise, homebuyers are increasingly hopeful that new construction will present more affordable options. This voracious appetite for housing has left builders unable to get homes up fast enough. As a result, construction has surged to the highest levels in 15 years and bolstered homebuilder confidence throughout the second half of 2020. From September to November building permits were up 21% compared to the same time in 2019. In December both residential permits and the start of new construction of residential structures significantly increased. Many of these new builds will be ready to buy in the second half of 2021.

Historically low interest rates are not just helping homebuyers; they’re also allowing builders to borrow more cheaply for the cost of their projects. Since the pandemic began construction has spiked and building materials, land, and labor are in high demand. Residential construction is being pushed to its limits in the face of higher costs, ongoing labor skills shortages, and regulatory cost burdens.

For 13 years straight, home builders have been constructing fewer homes than historic norms. Although the pandemic clearly disrupted the construction industry in 2020, the annual deficit of newly built homes has been going on for more than a decade. Usually, increasing the supply of new homes on the market leads to a drop in home prices. However, given the dire shortage of new builds and the fierce competition that’s driving up prices of existing homes, the amount of new builds that will come on the market in 2021 may only be enough to moderate price increases, not reverse them.

Sellers will be more likely to list after the pandemic

2021 will continue to be a sellers market. The vaccine rollout is underway, and warmer weather is around the corner. Once sellers start to feel some positive momentum around the pandemic and the economy, they’ll be more confident in listing their homes and it’s likely we’ll see the fastest, most concentrated influx of homes on the market in 100 years. We also anticipate more distressed homes coming on the market from those suffering from extreme financial hardship brought on by COVID-19.

Housing demand will likely be strong in 2021

Millenials in their 30s and 40s are spurring demand

Home sales are expected to outpace 2020 levels and remain strong through 2021. Amidst the uncertainty brought about by the pandemic, turbulent elections, and economic instability, people with job stability are looking to take control of their living situations and snap up homes that are listed for sale. The move to single-family home living has been accelerating over the last few years and millennials have been taking the lead as homebuyers. The oldest millennials are contributing to the trade-up market. Conversely, the surge in first-time homebuyers can be attributed to the largest group of millennials who’ve just aged into their prime household formation years. Looking ahead, the Biden administration’s proposal for a $15,000 first time home buyer tax credit will provide additional support to these borrowers.

Work from home may become permanent or semi-permanent

The pandemic forced many Americans to reevaluate their way of living. After months spent away from the office, many homebuyers have stopped waiting for a return to normal. Office leases are being cancelled and companies are exploring permanent, partial, or case-by-case work from home policies. As more companies allow employees to permanently work remotely, high-tax cities are likely to see a continued talent drain.

Increasing numbers of essential professionals and people who were able to transition to working from home are seeking spaces that accommodate their new way of working. The work-from-home or work-from-anywhere trend opened up new possibilities for people who previously considered themselves priced out of the housing market. In many cases this is prompting people to buy further away from their workplace or even migrate across the country in search of locations more suited to their homebuying budget. 2021 will likely see people invest more in their homes and choose to live in places that fit their lifestyles: people want space, privacy, and backyards. (Want to see how much home you can afford? Try our affordability calculator.)

2020’s tight credit standards are likely to loosen up

Mortgage credit availability decreased in early December, which indicated that lending standards were tightening. Less credit-worthy borrowers may have felt this squeeze in lending standards if they were applying for conventional home loans. This tightening in credit standards was offset by increased availability of government credit and jumbo mortgages. In fact, leading up to January 2021, the availability of government credit and jumbo loans increased for four months and three months in a row, respectively.

First-time buyers entering the market are now being supported by the greater supply of government loans and jumbo loans, which are partially driven by greater supply of lower-credit-score and higher-loan-to-value loans. This, in turn, will help sustain homebuying activity in 2021.

Mortgage rates will increase but will most likely stay below 3.25%

Mortgage lenders will temper interest rate volatility

2020’s low mortgage rates, ongoing demand for homes, and increasing home prices have boosted mortgage lenders’ profits. As the U.S. makes progress against the pandemic, mortgage rates are expected to rise.

Interest rates offered by lenders usually mirror the yield rates of 10-year Treasury bonds. (Treasury bonds, notes, and bills are government securities with different maturities. Collectively they’re referred to as Treasuries.) When the economy is doing well, the yield on Treasuries goes up, and so do interest rates. In 2020, yields on Treasuries dropped to 50-year lows and interest rates weren’t far behind. Lower interest rates means more profit for lenders as borrowers scramble to apply for mortgages. But in 2020, lenders reached their capacity to process loans which removed their incentive to base their interest rates on the significantly lower yield rates of Treasuries. This difference between interest rates and 10-year Treasury bond yields meant lenders continued to offer consistently low rates even when the yield on Treasuries started to grow.

Now that COVID-19 vaccines are being rolled out and the economy is looking up, Treasury bond yields will continue to increase, which usually means interest rates will rise in lockstep. These are not normal times and lenders are riding high on profits earned in 2020. So although interest rates are expected to become more volatile, lenders may be motivated to maintain the flow of mortgage applications by keeping interest rates below 3.25%.

The Fed has committed to purchasing assets throughout 2021

The Federal Reserve Bank (the Fed) has committed to purchasing assets, such as Treasuries and Mortgage Backed Securities (MBS), throughout 2021 to keep interest rates low and encourage more consumer spending. This is one of the techniques the Fed uses to help stabilize the economy. By purchasing Treasuries and also MBS, the Fed can put pressure on interest rates to go lower. This in turn makes it less expensive for people and institutions to take out loans. (Take a deeper look at what affects interest rates.) Until there is clear evidence the Fed is making progress on it’s inflation and employment goals, they likely won't consider slowing down their purchase of Treasuries.

Fannie Mae and Freddie Mac both expect mortgage rates to stay low

Low mortgage interest rates were one of the biggest reasons the housing market performed strongly during the pandemic. In the fourth quarter of 2020, mortgage interest rates were averaging around 2.8%—and they’re forecast to average around 2.9% through the end of 2021. However, the first week of January 2021 brought another historic low of 2.65% for the US weekly average 30-year fixed mortgage rate. Both Fannie Mae and Freddie Mac expect mortgage rates to stay below 3% in 2021. This is supported by the Fed, which voted that if needed it would keep interest rates closer to zero for a longer period of time until the U.S. economy recovers.

Consider a home loan sooner rather than later

With mortgage interest rates primed to go up in 2021, it’s a good time to lock your rate. If you are interested in a home loan, you can get your custom rates in minutes at Better.com. Our team is here to walk you through your options and help you make an informed decision about what home loan is best for you.