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What to Expect in Housing and the Economy in 2021

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Record-low mortgage rates supported the housing market in 2020, making it a bright spot in an otherwise pandemic-ravaged economy. Home sales collapsed in the spring when the initial spread of COVID-19 increased economic uncertainty. As the year went on, falling mortgage rates sparked a housing recovery.

Two crucial factors added to stronger demand for housing last year: Homebuyers’ preference for more space to better accommodate remote working and learning, and some movement from high-density areas plagued by COVID-19 infections to the suburbs or even other states.

While it boosted demand, the coronavirus pandemic also suppressed supply. Some potential sellers were wary of allowing strangers to view their homes. Construction, though deemed an essential industry, saw some disruption in materials and labor.

Finally, low mortgage rates led to a surge in refinancing as well as homebuying, enticing some homeowners to stay put as they lowered their monthly mortgage payments or shortened their loan terms. The combination of recovering demand and tight housing supply pushed home prices higher in the fall through the end of a rollercoaster year.

As millions of COVID-19 vaccines are distributed, the economic outlook has brightened — and housing will likely benefit, too. So what’s ahead for the housing market in 2021? Here are LendingTree’s top predictions about the year ahead.

Upside risks for 2021

  1. While mortgage rates are unlikely to fall much further (and may even rise a bit), they should remain low as the Federal Reserve keeps up its security purchases. Because Americans were so willing to take advantage of low rates during the pandemic, it stands to reason that they will continue to take advantage of them in the new year.
  2. Savings rollover from 2020 will support home purchases by wealthier households. While many households were hit hard financially by the COVID-19 pandemic, wealthier households tended to fare well, with many even increasing their savings. In 2020, there was an additional $1.6 trillion in household savings over the normal rate. If coronavirus cases decline as expected with vaccinations, and uncertainty about the economy tapers off, consumers are likely to feel more comfortable spending their savings on things like down payments or home renovations.
  3. With a new administration, the government may pass additional stimulus and relief measures, some of which might find its way into the housing market. This means some households may find themselves with excess cash to potentially put toward a home purchase.
  4. If implemented in 2021, U.S. President Joe Biden’s suggested housing policies would likely bolster participation in the housing market. For example, Biden’s proposed $15,000 tax credit could help cash-strapped buyers more easily afford a down payment and, in conjunction with low rates, incentivize homebuying.
  5. Biden and several prominent Democratic lawmakers have proposed forgiving student loan debt for millions of Americans. This action could free up a substantial amount of cash for many consumers, allowing them to devote more money toward a monthly mortgage payment or save up extra cash for a down payment and closing costs.

Downside risks for 2021

  1. The economy could remain weak even as it recovers through the year. If this happens, then labor market recovery will be tepid and income growth will be low. Beyond that, job losses in higher-income fields might become more prevalent, meaning fewer households will have money to put into the housing market.
  2. Supply problems will persist even if widespread vaccination efforts quell coronavirus cases. Because it takes time to build housing, supply problems are unlikely to disappear quickly, even as more builders return to work. If supply remains tight this year, then home prices will remain high, benefiting home sellers while hurting buyers.
  3. Mortgage lending requirements are likely to tighten further, making it difficult for people without high credit scores or down payments to enter the housing market. High home prices and stiff competition among buyers will add even more roadblocks.
  4. The end of foreclosure and eviction moratoriums is a wild card. Some borrowers will eventually default and lose their homes, and some landlords may be unable to meet their mortgage payments and face foreclosure, too. This could add distressed housing inventory to the market and potentially lower prices, but that could drag home values down for traditional home sellers.

2021 housing and economic forecast

Mortgage interest rates will rise 10 to 30 basis points (bps), averaging near 3%

Rate changes will continue to dominate the housing market in 2021. The decline to record lows in 2020 was a key driver of housing market activity, and this will continue into 2021.

Home sales will increase 10% to 15%

Although home sales took a dive in the first part of 2020 due to the COVID-19 pandemic, they bounced back in a major way by the end of the year. As the economy gradually reopens and more people return to work, this trend will likely continue into 2021, especially if rates remain below 3%.

Home prices will jump by 4% to 7%

Home sale prices accelerated in the latter half of 2020, spurred by high demand and low inventory. Home values will likely continue to rise in 2021 as people continue to move, but price appreciation might be offset by an increase in housing supply.

Housing starts might rise by as much as 15% to 20%

Lack of supply has been a major contributor to higher home prices in 2020. As construction work bounces back in 2021, the supply of new homes should increase as more homes are built. However, most new supply will be at higher price points, which builders find more profitable.

GDP growth to accelerate above 4%

There’s no doubt economic growth was erratic in 2020, but we might see more stability in 2021. GDP declined in the first two quarters of 2020 before rebounding in the third quarter. This growth will likely continue in 2021 as more vaccines are rolled out and the economy continues to recover.

Unemployment rate expected to fall to about 5% by December

The labor market contracted in 2020 as the coronavirus pandemic led to widespread stay-at-home orders that hit small businesses and certain industries hard with job losses. Unemployment neared a staggering 14.8% in April 2020, before falling to 6.7% in November. The labor market will continue to rebound in 2021, especially as various COVID-19 vaccines allow more people to return to work and state economies reopen. However, it’s unlikely that the unemployment rate will fall back to its pre-pandemic level of 3.5%.

Fed funds rate to remain stable at 0% to 0.25%

The Fed has been aggressive in its response to the coronavirus pandemic, cutting its benchmark rate to zero at the onset of the outbreak. It will likely maintain its current course and keep the benchmark rate unchanged throughout 2021.

 

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