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Home prices have skyrocketed since the initial onset of the global pandemic. Initial concerns over another housing crisis were quickly defeated as record-low inventory drove prices up in 2020. Low mortgage rates have helped offset rising home prices, but low rates won't be able to do that forever.
Home affordability has been a growing concern for the past several years, and as we enter 2021, the outlook on home affordability doesn't look much better in the coming year. Prospective homebuyers and investors hoping for some give in real estate values may be sorely disappointed.
Low inventory and high demand will dominate 2021
Realtor.com recently conducted a national forecast study for the 2021 housing market that predicts existing home sales will rise 7% above 2020 levels. Interest rates are expected to increase slightly in the second half of 2021, which may cause a short-term spike in buyers trying to capitalize on low mortgage rates. But as a whole, Realtor.com predicts sales should return to more of a seasonal pattern, with the rate of price growth slowing slightly.
Suburban properties are expected to be in highest demand, particularly those that advertise an office space of some form as work-from-home orders continue. Realtor.com predicts markets like Boise, Idaho; San Jose, California; and Seattle will see a 9% to 10% growth in home values in 2021, with several other markets hovering around 3% to 7%.
Is home affordability a hope of the past?
The affordable housing crisis isn't a new concern. Homeowners and renters, particularly those in the lower- and middle-income brackets, have struggled to find quality, affordable housing for the past few decades.
Increasing home values is great for sellers, but prospective homebuyers with a limited amount of money saved to buy a home won't be so lucky. To put in perspective, a $250,000 home that's located in a market expected to see a 4% increase in home values in the next year would be valued at roughly $260,000. The increase in price would only require the homebuyer to bring an extra $1,000 to the closing table, assuming a 10% down payment, and would increase their mortgage payment by $42.16 per month, assuming a 3% fixed-rate interest rate. If interest rates increase to 3.5% by the end of 2021, their mortgage payment would increase $113.51 per month compared to prices and rates today.
This may not seem like much, but when home prices already outpace the average wage by over four times, there's a clear issue, and the gap for affordability seems to be widening.
The Millionacres bottom line
The best way to prepare for the continued increase in values and sales activity is to take advantage of current home prices and low interest rates now. There is always a chance of a second recession, particularly if a flood of foreclosure properties hits the market at the end of 2021 because foreclosure moratoriums have been lifted and governmental relief isn't extended, which could reduce prices slightly from increased inventory.
There are still a lot of unknowns about where the market will go. But right now, the sky's the limit.
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