The Future Is Bright for Residential Real Estate Heading Into 2021
Ah, the dumpster fire year known as 2020 has finally come to a close. The past 12 months have been nothing short of an atrocity. It is almost as if an eight-year-old binge-watched Day After Tomorrow, Contagion, and House of Cards while eating too many Skittles and came up with his own 8,760 hour-long featured flick that he sold to irresponsible movie executives. And, except for key players like Dr. Fauci, we’re all just minimum-wage extras along for the ride.
While we can all universally place the blame on Hollywood (for not making us the leads in their groundbreaking film, of course), the world is a much different place than it was a year ago. COVID-19 has been the biggest harbinger of change, shutting down retail and the service industry and leaving millions unemployed. Other industries, like education and finance, have gone remote and sped through what experts claim to be a 10-year acceleration in merely a few months. The worst damage can be seen within our social relationships. Canceling major family gatherings and holidays has all but isolated us, leaving many in despair during the long, bleak winter season.
In real estate, the need to adapt hasn’t been any different. Back in March, agents across the country were left stranded wondering how quarantining would affect their livelihood. Fortunately, associations like the National Association of REALTORS® utilized their lobbying efforts to make agents “necessary workers” in the majority of the United States. With this ability to work, agents adapted their day-to-day routines by using technology to their advantage. Whether it was Facetime home tours or using virtual reality to sell a home, agents like yourself never stopped working and kept the industry afloat until the summer months when the industry soared.
While many different jobs were limited or erased by the pandemic, real estate also found itself in a unique position of actually growing as an industry. According to Realtor.com®, their Housing Market Recovery Index has tracked full recovery since June, and the industry continues to climb past the markets’s pace in January 2020. This expansion against the grain of most other industries is just another example supporting the recession-proof advantage of working in real estate.
2021 Real Estate Outlook for the United States: Heating Up
While the initial months of the pandemic saw a decrease in real estate activity, and thus a stall in home prices, the residential industry rebounded and saw prices rise 7.5% year-over-year. The median value of homes in the U.S. is currently $263,351, but the majority of these homes are being sold at a 34.9% uptick. Overall, 576,672 homes were sold in the United States in 2020, a 19.6% increase from the year before.
Housing Demand: 2020 saw a 13.6% year-over-year increase in homes sold above listed price. This increase can directly be attributed to historically low mortgage rates.
Housing Supply: Over 18 months ago, 1.7 million homes were on the market. By the beginning of December 2020, that number dropped to 909,295 homes. The median days a home is on the market is 27 days, an 18 day drop year-over-year. Much of this limited supply centers on a few factors: the high cost of materials due to tariffs on China, a limited construction labor force, and homeowners having more equity in their appreciating homes.
The future for homeownership should continue to see similarly robust conditions heading into 2021, with experts predicting a 10.3% year-over-year increase. Many factors will affect the industry moving forward, including how the Biden administration addresses China, a need to reassess regulations on climate change, and new tax structures and their effect on those generating more than $400,000. However, due to the red tape binding our bureaucratic institutions, it’s unlikely any new laws or restrictions will come into effect until 2022. The speediness of vaccine distribution, the reopening of the economy, and how the Federal Reserve addresses rates will be more current factors affecting the U.S. housing market this upcoming year.
The pandemic forced many residents of major cities to pack up their belongings and leave places like New York and San Francisco. The National Rent Index saw an almost 1.5% drop in rental prices across the country, but most of this drop came from these major cities. Just because rents dropped doesn’t mean people are gone permanently, and not all cities saw these distinct population shifts (just the big ones). In fact, places like Boise, Idaho and Fresno, California saw a significant rise in their rent prices.
Affordability and restrictions from the pandemic are partially why rental markets are acting this way. People are over the hustle-and-bustle of claustrophobic public transportation, limited living space, and other stressors of living in the priciest cities. Smaller, more affordable cities and the once-dreaded, now lauded suburbs provide the ability to live without feeling restricted. Much of this moving - especially from Silicon Valley - stems from remote work becoming a more permanent option for many workers.
Overall, 27 of the nation’s 30 largest metropolitans have seen a drop in rental prices. This drop is creating a big divide within the market. There’s no clear indicator whether these former city dwellers will return to their concrete jungles. Much of that will deal with how local city governments reinvigorate their cities post-COVID-19 (we’re looking at you, DeBlasio) and the certainty of long-term remote positions.
2020 U.S. Real Estate Market Data
|Zillow Home Value Index||$263,351|
|1-Year Change on Home Values||+7.5%|
|1-Year Change on Rent Prices||-1.5%|
|Homes With Negative Equity||3.0% (Q3)|
|Delinquent on Mortgages||7.7% (Q3)|
|Buyer’s or Seller’s Market||Seller’s|
2021 U.S. Economy and Market Outlook
The current unemployment rate in the United States hovers around 6.7% and should continue to drop as vaccinations become more available. However, the economy and influencing factors are a sort of mixed bag when it comes to a positive or negative outlook. Here is a quick breakdown of what to expect outside of the residential real estate market.
During Q3, the economy expanded 33.1% but The Conference Board’s economic forecast for the U.S. looks to drop to just 2.8% leaving Q4. This recovery did not fully make up for the 5.0% loss in GDP that occurred in Q1 and is a strong indicator that the economy has gone through a recession (albeit a short one). Jobless claims on December 12th rose sharply to 853,000 due to the reclosing of some industries like restaurants and retail stores. The Federal Open Market Committee (FOMC) expects a 4.2% GDP expansion in 2021 with a slowing down of growth as we head further into the roaring ‘20s.
Stimulus checks and the Coronavirus Aid, Relief, and Economic Security (CARES) Act have helped those without jobs or income to sustain themselves for now. The total U.S. mortgage debt has reached a 15-year low. However, when the checks stop flowing and CARES expires, foreclosures could resume in 2021. On the other side of this issue are landlords who are also suffering without sufficient funds for themselves.
CARES also has provided federal loans - sometimes forgivable - to small and medium-sized businesses. Without more relief for retail and the service industry, companies may begin falling behind on their own payments, hurting their commercial real estate landlords, and thus the banks leveraging those businesses.
The U.S. Bureau of Labor Statistics predicts that the number of jobs should grow from 162.8 million to 168.8 million by 2029. Industries that are expected to grow the fastest include health care, social assistance, and computer occupations. Companies revolving around technology that automates and eCommerce is expected to shrink, but only in specific office and administrative positions such as typists, data entry keyers, and administrative assistants/secretaries.
Back in March, the FOMC held an emergency meeting that lowered the federal funds rate to 0.0% on the lower range. They confirmed months later that this rate will act as the benchmark for increases in inflation and, in December, forecasted the rate to sustain until 2023. Simply put, the Federal Reserve wants to keep money cheap and increase consumer and business spending. As many of you may remember from President Obama’s administrative policies, this methodology restarts Quantitative Easing to help the country expand its economic activity for the next few years. As for mortgage debt, it remains low as a result of the CARES protections and loan forbearance. However as we head into 2021, this sort of aid may diminish, causing foreclosures around the country. The current 30-Year Fixed Mortgage Rate is hovering around 2.8%.
On January 7th, Congress finished counting the electoral votes and declared Joe Biden as the winner of the presidential election. While Biden will most likely be able to push his agenda of climate change policy, increase in taxes for high-income households and business, and other law changes thanks to the recent victories of Jon Ossoff and Reverend Raphael Warnock, a potentially bigger issue will be the departure of President Trump from the White House. The storming of the Capitol Building could have lasting impacts on how Republicans work with Democrats moving forward. With the majority of Republicans who were going to vote in favor of potential election fraud flip-flopping after the assault, it sets up the potential for a more bipartisan effort by both sides to create solutions for our country heading into 2021.
The dollar should see a 1.9% increase in inflation in 2021 and remain around that figure for the next few years. However, this core rate excludes gas and food prices, as both of these commodities are seeing high volatility due to COVID-19 and other international affairs.
COVID-19 New Strain and Vaccinations
A new strain of the coronavirus has emerged in the United Kingdom and is now spreading throughout the world. Although not any deadlier this mutation is more contagious. Scientists believe this may be due to the virus being able to store a larger viral load in main dispersion areas such as the nose and mouth. Essentially, more of the virus lingers in these areas and increases contagion when someone sneezes or coughs. Meanwhile, phase one of vaccinations have begun over the past month, but lawmakers and experts are unsure whether to first inoculate everyone before administering a second dose or give both doses to essential workers who need it for their jobs. The former would decrease the transfer of the virus while the latter will make the vaccination more effective.
Unlike the economy, the stock market has roared to life, hitting all-time highs as investors continue to pump the market with more cash. The likelihood of this activity being sustained over time is uncertain and will depend on geopolitical and trade tensions with Iran and China to subside. The completion of a Brexit deal does bring some stability to European markets, although many experts forewarn the language within the deal is vague and restricts trade between the U.K. and the rest of Europe. If quantitative easing does eventually slow down, lawmakers will turn to discussing increasing taxes to make up for any market pullback. There is also the possibility of a zombie economy - companies not generating enough income to pay off debt obligations - hurting the stock market in the long haul. With about one-fifth of U.S. companies considered zombies, it is possible that any aid that is keeping these corporations alive will be used for paying off leverage and won’t be used for growth.
Commercial Real Estate
Commercial real estate (CRE) depends on tenant businesses paying rent but that becomes difficult when the country shuts down due to a pandemic. The sectors most likely to take the biggest hit in commercial real estate deal with office and retail space due to the migration towards remote work and the reduced need for in-person purchase. When you look at other sectors, specifically warehousing needs for storage (eCommerce, self, pharmaceutical, grocery, etc.), these areas of CRE are considered coronavirus-proof and have grown substantially because of quarantining and social distancing guidelines. As the pandemic rages on, these types of sectors will continue to flourish. Other items to look out for heading into 2021 within the commercial real estate sector include:
- Stock market correction within REITs, derivative ETF and Mutual Fund investments, and publicly-traded stocks involved with or possessing large exposure to the CRE sector could take a big hit.
- Credit ratings of banks being downgraded.
- Banks denying mortgages to those without steller personal credit ratings.
- Lending companies like Quicken Loans taking on a bigger chunk of the mortgage market.
- Commercial real estate firms seeking debt financing from non-bank lenders (NBL).
- Demand for homes decreasing due to a lack of financial backing (i.e. fewer mortgages being processed means less money available for home purchases).
The Only Certainty Heading Into 2021 Is The CE Shop
Whether you’re a new agent looking to start award-winning Pre-Licensing education or an experienced veteran wanting to finish your Continuing Education, we’ve got a 100% online curriculum that’s one of the most diverse and groundbreaking in the industry. And if you want to network with your peers, join our Facebook group and get connected!