In taking a look at the 2021 real estate and mortgage rate forecast, I’ll briefly analyze what’s driving the real-estate market and what should impact interest rates over both the long and short term.
Similarly to 2020, the biggest issue will be finding enough homes for buyers, as housing inventory is near all-time lows throughout much of the country.
At the same time, because of today’s low mortgage rates, housing affordability is at a fantastic level, even with increase in home prices, which is great news for buyers.
First, let’s take a look at 3 different factors regarding real estate that impact pricing – supply and demand, appreciation, and home affordability.
Supply and Demand
You might remember the idea of supply and demand from your economic or social studies school days. Real estate prices also depend on the law of supply and demand. When the demand for property is high but property is scarce, prices rise and it becomes what is known as a “seller’s market”. Alternatively, when the number of available properties increases and saturates the market, prices typically drop.
Right now, we are in a time of low supply and high demand – making prices rise.
There are a few reasons for this phenomenon, and we will see them into 2021 and beyond.
First of all, the number of first-time home buyers is actually increasing, mainly due to the number of babies born in the late 1980s and early 1990s. The average age of a first-time buyer is 33…and you can see by the chart below, we are just getting started:
Millennials are expected to drive the market in 2021, while Gen-Z buyers, the oldest members of which will turn 24 in 2021, will also step onto the playing field as first-time buyers.
Over the next 4 to 5 years, there will be more buyers in the marketplace, increasing demand, keeping prices moving slightly upward.
Housing development continues to lag across the nation. Thanks to a 3 to 6 month shutdown that started in March of last year due to Covid-19, new construction slowed considerably in 2020:
As you can see by the chart, there just were not as many homes built last year than in years prior. This is creating shortage of inventory for would-be buyers…which means prices move higher, as well.
If you’ve been checking up on the latest real estate news, you’ve probably seen quite a few reports saying that housing inventory is low at the moment. Well, those reports are absolutely correct:
As you can see in the chart above, inventory has acutely been falling since 2011 and has reached all-time lows in 2020.
Frank Nothaft, a senior vice president and chief economist at CoreLogic, said low home inventory has led to rapidly increasing prices across the nation as dedicated buyers compete for a limited number of homes.
However, he said the number of homes for sale will increase with widespread vaccination for the coronavirus, which kept some of the most vulnerable homeowners from selling this year.
Believe it or not, current research shows that housing has actually become more affordable this year, despite home appreciation and tight inventory. Affordable homes are possible thanks to lower mortgage rates and greater purchasing power.
For example, weekly earnings are up more than 5.9% versus a year ago. Additionally, only a portion of your income goes towards paying your mortgage. A 5.9% rise in income can offset a much greater percentage rise in housing expense.
For the average home buyer, month-to-month housing costs are lower than they’ve been at almost any point in the last four years because real wages are up and interest rates are down, even considering the Covid-19 pandemic.
This tells us that homes are actually more affordable, even though they have appreciated significantly over the last few years.
You can find out some specifics about housing affordability here….
This is fantastic for homeowners, and although 2021 might not have the same increase, most experts see appreciation to be in the 4% to 6% range in 2021.
“The housing market performed remarkably well in 2020 despite the volatile economic state. While we can expect to see lingering effects of COVID-19 resurgences and subsequent shutdowns in the early months of 2021, vaccine distributions and stimulus actions should revitalize economic activity and keep home purchase demand and home price growth strong. – Frank Martell, President and CEO of CoreLogic
Mortgage rates have risen a little during the first 10 days of 2021, due to the market’s concern that there will be increased spending, debt, and inflation with the incoming administration. The 10-Year Treasury yield is now at its highest level in a year, which is the best tracker of mortgage rates – find out more about that here…
Federal Funds Rate
How can mortgage rates actually rise when the Fed Funds Rate remains at zero? Let’s remember that the Fed Funds Rate and Mortgage Rates are two very different things.
The chart below shows how mortgage rates move in a similar direction to the Federal Funds rate, but still move up-and-down, even when The Fed has rates at 0%.
As you can see, mortgage rates can move up over 1% even with the Federal Funds rate at 0%!
You can find out more about the relationship between the Fed and mortgage rates here…
It’s important to remember that although we’ve seen a little move higher in mortgage rates in the first week of 2021, they are still near all-time low levels.
Per most industry analysts, rates should remain low for 2021, although there may be some ups-and-downs due to inflation related pressure.
Mortgage rates are affected by inflation because inflation erodes the buying power of the fixed return that a mortgage holder receives. Interestingly, the best way to combat inflation is by raising the Fed Funds Rate. If inflation begins to rise, and there are already some signs of this, Mortgage Rates will start to climb in response. All this can occur while the Fed Funds Rate is at zero.
With that said, the industry experts I follow seem to think that we should see rates in the 3% to 4% range for the 30-year mortgage over the course of 2021.
Debt and Interest Rates
One reason to believe rates will stay low, even with Covid-19 concerns and inflation, has to do with governmental debt loads relative to mortgage rates. Historically, the higher the debt, the lower rates move.
The chart above shows the debt level in red (moving upward) and interest rate level in blue (moving downward). With all of the debt that the US has taken on in the last year, we can probably expect to see rates stay relatively low.
2021 looks to be a positive one for both buyers and sellers, although the market would clearly be considered a “seller’s market”, because inventory is so low.
However, because real wages are up, home affordability is up, and interest rates are forecasted to remain low, buyers are in a great position to purchase.
To sum up the 2021 real estate and interest rate forecast:
- Mortgage rates are likely to remain low
- Housing inventory will continue to remain low
- Demand for real estate will rise due to a combination of factors
- Home prices will continue to move upward
- Housing will still remain affordable, due to low rates
In reality, now is a fantastic time to purchase or refinance and take advantage of market appreciation and low mortgage rates. Contact me for more information, as it would by my privilege to help you.