The housing market trends of the upcoming year are probably one of the hottest topics as far as real estate goes. Whether you are looking for a good real estate investment or just keeping up with the housing market to find the perfect opportunity to go in as a home buyer, there are some interesting predictions regarding the year 2021.
Some expect a housing market collapse, where prices plummet to the ground, and inventory is readily available. A housing market crash is expected in 2021 since many signs show we are heading that way. Many people find it worrying, and since the coronavirus pandemic has already caused some major disruptions in the supply and demand for housing.
The US is a big country and some areas were hit harder by the pandemic than others. The consequences will be more evident in the upcoming year. But, are we due for another real estate recession? How hard will it affect the US, and is there a way around it? Let’s find out what are the housing market predictions for 2021.
Analyzing the housing market in 2020
Some cities are most vulnerable to be hit first by a recession, but we all hope for the best. However, it seems that all our fears related to the housing market are slowly taking shape. The housing market in the US has remained strong throughout the pandemic because it pushed the housing demand and record-low mortgage rates, encouraging home-buyers to seize the opportunity. Home prices are reaching record highs, and homebuyers are looking for deals.
As of now, the real estate market is a hot seller’s market, but it might be just a matter of time until inventory runs low since it continues to fall rapidly. If we have experienced a strong US housing market so far with respect to buyers demand, realtors point toward more balanced conditions and a softer demand compared to the previous months.
In March-July, a great part of the country was in lockdown, trying to keep the Covid-19 out of their homes, and as a result, there was a pent-up demand for home purchases. Summertime indicates that prices remained strong, and the high demand, along with increasing short inventory, further raised home prices. During the winter season of 2020, the real estate market will continue to rise in sales and prices but at a slower pace.
Strong buyer activity is foreseen for the fall and winter season as they may face more competition and are urged to act quickly if they want to make a home purchase. On the other hand, the Mortgage Bankers Association’s Research Institute for Housing America reports that more than 6 million households failed to make their mortgage and rent payments in September.
All these aspects point towards an inventory that is falling to record lows, mortgage lenders who are tightening the standards that qualify buyers for a mortgage, and existing home sales are predicted to fall back over the remainder of the year.
Signs that point towards a housing market collapse in 2021
Looking back at what the year 2020 was like for the real estate market, it is uncertain what the future holds. Many of the trends going forward resemble the housing market in 2006 before the financial crisis, and for many people, this is a warning sign. With low inventory and less interest from home buyers, the housing market suffers and many real estate agents fail and get out of business.
Aside from analyzing the evolution of the real estate market in 2020, what other signs might indicate an upcoming housing market collapse. Let’s find out.
1. Homebuyers losing interest in buying properties
Another sign that might point toward a housing market collapse in 2021 is the recent stock market crash of 2020, which can only worsen those fears. A recent study done by the National Association of Realtors found that 90% of its members have reduced home buyer interest, and 60% delay the purchase.
Real estate agents believe that one of the most significant signs of a crash is inventory. The demand rate is vital in determining how long it would take for homes currently listed to sell. In a healthy, balanced market, you would have a supply of about six months, and anything below that would mean that we are dealing with a seller’s market. Anything above six months is pointing towards a buyers market.
If the supply and demand requirements are met, you have a healthy housing market, but as soon as the supply is increasing but not the demand, it is a sign that the market is about to shift. If this situation leads to a real estate market collapse, it might be a good idea to look around for recession-proof cities.
2. Increasing supply in the form of foreclosed homes
One of the significant effects of the year 2020 on the housing market will be the foreclosures of today, which will only be processed late in the summer of 2021. For now, the foreclosure moratoriums prevent lenders from being able to process their defaults. As far as the housing crash prediction goes, foreclosed homes’ supply may overwhelm the demand in 2021. In this situation, prices are going to plummet again, and the real estate market is going to cool off in 2021.
3. A shift in the rental market
If we look at the US rental market, signs show that it’s getting looser, and the vacancy rate can rise even further to 6% by the end of the year. Rental growth will go down in the next quarter, but beyond that, with the lack of homes for sale, the rental market should recover along with the economy.
If we consider the gap between the historically expensive rental markets and cheaper ones, we notice a decrease but at a slower rate. Research done by the National Association of Realtors shows that the standard deviation of 1-bedroom apartment prices in the top cities has decreased by almost 20%. The exodus from urban areas shows a fall in rent prices across major US cities because people are having difficulty finding jobs during the pandemic.
4. Accelerated growth in home prices and then a plateau
A warning sign for a potential housing market crash is the home price plateau after a consistent growth. The land is an appreciating asset, and the home prices usually increase year-over-year by about 4%. If home prices level out, it affects the real estate sales market and home appreciation. When sellers are unable to sell their homes, they lower the price in the hope that they will attract more buyers.
5. An increase in risky mortgages
The increase in risky mortgages on the market signifies that the housing market is not going in the right direction. Situations like this occur when lenders lower the standard that qualifies people for a mortgage. You might be able to see a drop in the minimum credit score required to purchase a home or people with bad financial records applying for loans.
An imminent housing crash can occur due to an increased number of riskier mortgages on the market place. Lenders loosen up underwriting standards enabling higher-risk mortgages that can trigger a housing crash. Scenarios like this enable high-risk borrowers to apply for mortgages, and lenders approve mortgages for homes that can’t be paid off or houses that are evaluated above the market price.
6. Asset bubbles burst
With the real estate market trends experienced so far in 2020, it is easy to see why the demand for homes is increasing. Rapidly rising home prices point out to a potential asset bubble, and many see it as an opportunity to invest in that asset. But what happens if the dramatic rise is just temporary and the market value does not support it? The real estate bubble bursts.
Market crashes occur when the asset bubble bursts. A sign indicating that something like that might happen in 2021 is the rapidly rising home prices. The national average home price hit a record high of $184,613 in July 2006 in anticipation of the 2008 financial crisis. In January 2020, the national average home price hit a new all-time record of $212,433. Similarly, the Homebuilders Select Industry Index had risen by about 250% when last checked in February 2020 since October 2011.
7. Increasing interest rates
If you have a mortgage, at times, you enjoy the low-interest rates, which make your life easier, and other times, you are upset that the interest rate has increased again. But what happens if it increases continuously, and it never seems to go down again? It might be the sign of an upcoming housing market collapse.
High-interest rates make loans more expensive and it slows the construction of new buildings. A steady and slow interest rate increase is not going to be catastrophic, but if it raises quickly, it will not be suitable for the real estate market. High-interest rates preceded the housing collapse in 2006, and it is a sign that the new year might bring about the same thing.
As you see one or more of the above signs unfolding before your eyes, you might be worried about a potential housing market crash. However, one sign might not betray the fact that the housing market will experience an inevitable crash. Real estate has dealt with many of these issues before, and they were not the harbingers of a collapse.
By having the right knowledge, you can now ask the right questions concerning the local housing market and find out what the future holds for you in it. We don’t offer a perfect formula that predicts whether or not the housing market will crash. Still, we do provide the right idea that will help you as an individual make informed decisions regarding the real estate market.
If you are unsure what the local housing market holds for you, ask people who are more informed and experienced than you. You can always find a real estate agent or investor who is able to help answer some of your questions regarding the current situation of the housing market and what to expect in the future. Also, if you find our content useful, don’t hesitate to share it on your social media platforms and leave a comment below. Let us know what you think are the housing market predictions for the upcoming year?