Housing inventory declined 39.6% on a national level in 2020, making 2020 the lowest housing inventory year on record, according to Realtor.com. Adding to the record-breaking low inventory this past year has been increased buyer demand -- although, saying "increased demand" is an understatement. Zillow (NASDAQ: ZG) (NASDAQ: Z) calls the persistent demand for homes we've seen in 2020 "insatiable."
Low inventory and high demand lead, of course, to increased housing prices; in this case a 13.4% increase, which translates to a national median of $340,000 as of December 2020. But where are we headed in 2021?
Some background: sellers
To understand 2021, let's first look at the reasons the 2020 market has been, shall we say, unique. Part of the reason for low inventory in 2020 was seller uncertainty. And not uncertainty about whether homeowners can sell; the uncertainty comes from what they'll do after they sell.
Because of this insatiable demand for housing, homeowners are torn on what to do. On one hand, they can get top dollar for their home (assuming it's in reasonable condition) if they list now, and quickly too, as houses aren't staying on the market long. But many are afraid they might not get another house they can afford in this market. So homeowners are generally holding on to what they have, slightly more now than last year, further decreasing inventory.
As far as foreclosures: While more are expected to happen in 2021 due to people losing their jobs from the coronavirus pandemic, depending on how the new administration reacts regarding stimulus and forbearance, there might not be the numbers of foreclosures as there normally might otherwise be, further lessening supply.
Some background: buyers
Another reason for low inventory is increased motivation of buyers. There are several reasons for increased buyer demand.
1. Record low mortgage rates
Low mortgage rates have been causing people on the fence to take a stand and buy already.
2. Millennials age up
This group of 24- to 39-year olds who have been putting off homebuying longer than past generations is finally settling down.
3. The coronavirus pandemic (a reason for practically everything in 2020)
People who were content as renters in urban cities started leaving for social distancing reasons. Their destination: the suburbs and exurbs, particularly since working from home has become a thing -- not to mention as cities locked down, there was nothing much to do in them anymore.
What to expect in 2021
The real estate market always tries to reach equilibrium: the perfect match between sellers and buyers. But that can take time. Because the 2020 market was nowhere near this -- instead, a huge sellers' market -- 2021 will be trying to reach equilibrium. So expect to see more of the same until this equilibrium happens: low inventory, high demand, rising prices, and low interest rates.
Whenever the supply of new homes on the market is below 6.5 months (a number which represents how long it will take to sell the existing supply), builders become confident to build more homes. As of December 2020, the supply of new homes was 3.3 months -- representing a supply so low that builders are not merely confident; they're downright excited to start building.
Not only is the supply of new homes low, so is the supply of existing homes on the market. Due to high demand, existing homes are also selling fast. As of December 2020, there's a 2.5-month supply, an all-time low.
So expect to see more housing starts in 2021, but since builders like to get top dollar, don't expect them to overbuild.
Demand for houses should remain high in 2021. Low interest rates have a lot to do with this: rates aren't expected to go much higher than 3% for 2021. Combine that with millennials entering their homebuying years, and demand should remain strong this year.
The way the market handles low inventory combined with strong demand is with rising prices. This year, prices might rise to the point of keeping many first-time buyers from being able to purchase, as coming up with a down payment could prove to be too big a hurdle. With that said, savings are at historic highs, so many first-time homebuyers, although they don't have home equity in their arsenal, they do have money in the bank.
There have been no announcements by the Fed of an increase in interest rates anytime soon. If the economy improves due to getting a handle on the coronavirus and a new administration, rates could start to go up from these all-time lows, but since they are hovering around 2.5% at 2021's start, even if they do rise in 2021, they will still be at historically low.
The Millionacres bottom line
As 2020 closes out, the real estate market should have adjusted some. You can expect more inventory to come on the market, and that should help start the correction process. But you can safely assume housing prices will rise in 2021 -- at least until there's more inventory and higher interest rates, probably above 4.5%.