2020 was a truly unprecedented year. With it behind us, let’s look ahead at several housing market trends that are likely in 2021 and beyond.
First, exceptionally low mortgage rates are likely to be around for an extended period. The Federal Reserve is expected to continue an accommodative monetary policy and keep the federal funds target below 0.25% through 2022.
This should ensure that initial rates on ARMs will remain low, and we also expect 30-year fixed-rate loans to remain below 3% during early 2021 and average about 3.1% during the next two years.
This would be a percentage point lower than the 4.1% average during the 2010 to 2019 time period. These low rates will provide an excellent opportunity for families with good credit to buy or refinance homes. Using CoreLogic TrueStandings data, we estimate that there will be about 20 million home mortgages outstanding at the start of 2021, with a contract interest rate of 4% or higher.
While some of these are less likely to refinance because they have a low balance, a recent delinquency or have been in forbearance, there are still plenty of borrowers who will refinance in 2021. Expect refinance volume to remain brisk, albeit less than in 2020.
Second, Millennials will add substantial demand to the housing market over the next few years. Looking at America’s population by single year of age, the largest numbers of Millennials in 2021 are those aged 29 to 31. With the median age of recent first-time homebuyers at 33 years, demographic forces will add an important tailwind to home-buying demand.
In fact, we expect home sales relative to the housing stock, a measure of home “turnover,” in 2021 to 2023 to be above the average annual turnover rate of the prior two decades.
Millennials and Gen Z will fuel household growth. Because of these two cohorts, the total number of households are forecast to rise an average of 1.3 million per year in the next couple of years, or about 1% growth in net households per year. Millennials and Gen Z will offset a decline in households headed by Baby Boomers and the Silent Generation.
And new households will be far more diverse by race and ethnicity. While about two-thirds of households were white, non-Hispanic last year, about three-fourths of the net growth in households will be minority.
Third, we expect home prices to rise in most neighborhoods, albeit at a more modest pace than in recent years. U.S. price appreciation is expected to average 3.4% per year during the next two years, compared with 4.8% per year during the prior decade, as measured by the CoreLogic Home Price Index.
One reason for slower value growth is because we expect for-sale inventory will increase. 2020’s pandemic delayed new construction and led many prospective sellers to postpone listings: The median age of a homeowner was 57 years in 2019, and with older Americans at greater health risk during the pandemic, many that contemplated home selling decided to wait.
Once the coronavirus dissipates or a vaccine is widely available, we expect to see the number of new and existing homes listed for sale to rise, helping to ease price appreciation.
One caveat: while we predict many neighborhoods will see gradual price growth, some metros that have been especially hard hit by the pandemic recession will likely have price declines. Communities that have a local economy largely based on tourism, hospitality, business travel, entertainment and restaurant/retail are likely to have elevated unemployment for an extended period and face home price declines. These places will likely see an increase in distressed home sales which will add additional inventory to the local housing market.
Low mortgage rates, growing numbers of first-time homebuyers and gradually rising home values are three housing market trends we expect in 2021 and beyond.
This is the latest installment in our HW+ 2021 economist forecast series that features top economists in the industry. In addition to this HW+ article, we will be hosting a Q&A discussion with each economist on our slack channel each Tuesday at 11 AM CT. If you’re not a part of our slack HW+ community, email [email protected].