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10 Real Estate Market Predictions for 2021

By Thomas O'Shaughnessy | January 5, 2021

Will the COVID-19 pandemic be over? Will everyday life return to the days before coronavirus? Will the economy recover to pre-COVID levels? How will the housing market fare in 2021? Is this year the right time for first-time home buyers?

Recognizing that real estate values vary considerably by location and use, the likelihood for significant change in the residential real estate market conditions over the next 12 months. Contrary to conventional economic wisdom, the housing market remained strong during 2020 due to buyers' continued activity coupled with a lower supply of houses due to reduced construction activity and reluctant homeowners to put their homes for sale.

So, although no one can truly know what's in store for the real estate market in 2021, here are a few predictions.

Prediction 1: The U.S. economy will recover in 2021

According to the National Bureau of Economic Research, a recession is "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." A review of the factors that indicate a recession suggests that 2021 will generally see positive increases in the economy.

Real Gross Domestic Product is expected to grow 4.74% after a decline of 5.91% in 2020, and the Congressional Budget Office predicts the unemployment rate will fall 20% or more. Personal income will rise slightly, while long-term interest rates will remain at 1%, and inflation will be under 1.5%.

Prediction 2: Buyer demand will continue to grow

As economic stability returns and personal incomes rise, the number of first-time home buyers will increase, resulting in greater competition for desirable homes and upward pressure on home prices. 

Positive factors that fuel demand include continued population growth, rebounding personal income rates, and improving consumer confidence. President-Elect Joe Biden has proposed a $15,000 tax credit for first-time homebuyers, which, if passed, will further spur buyer demand.

Prediction 3: Mortgage interest rates will remain low

Lawrence Yun, chief economist with the National Association of Realtors, expects that 30-year, fixed mortgage rates will remain stable or slightly increase in 2021 from the 50-year low of 2.71% in 2020.

So, while the mortgage rate may go up a bit, it will still remain historically low, further spurring buyer demand.

Prediction 4: Housing supply will lag in 2021

Although the number of existing homes available for purchase will rise as sellers become more comfortable opening their homes to prospective buyers, new home construction will be restrained for most of 2021 as builders "grapple with a shortage of lots, labor and building materials," according to National Association of Home Builders (NAHB) Chairman Chuck Fowke.

Affordability and the gap in the cost of living across the U.S. will continue to be a problem, especially in areas where housing is in high demand with few new construction projects.

Prediction 5: Home buyers will move to the suburbs

The centuries-old migration from rural areas to the city is being reversed as more people flee the country's metropolitan areas' high costs and aging infrastructure. 

Encouraged by the COVID-19 conditions that forced many people to work from homes (and the improved technologies accompanying remote work), more people are retreating to suburbs and rural areas, something that will likely continue in 2021.

Prediction 6: House size will continue to grow

The average single-family home size in America almost doubled in the last century to more than 2,430 square feet in 2020, even as the average number of people living in a house fell from 4.54 people to 2.58 people. On the other hand, the typical rental unit size in a metropolitan area shrank by 5%, though rents increased by 28%. 

These dynamics drive the appeal of suburban and rural residence for city dwellers. Another factor of the growth of house sizes is the possibility of making more profit on a home sale.

According to Louis Hyman, a historian at Cornell University, Americans began to view their homes as assets that could appreciate, rather than merely living space: "You borrow as much as you possibly can, you buy the biggest possible house you can, and then you can make more money on the upside if you think house prices are going to go up."

Prediction 7: Technology access and use will be necessary home features in 2021

Advances in technology have changed the ways Americans work, play, learn, and communicate. Houses in neighborhoods or areas that lack access to high-speed internet – technology deserts – are increasingly avoided by new home buyers used to mobile phones, remote work, and streaming entertainment. 

According to CNBC, the average home in America is packed with a wide range of sophisticated devices that touch every aspect of our lives, including wireless security systems, appliance monitoring devices, and digital assistants.

Prediction 8: Technology use by realtors, agents, and affiliates will continue to expand in 2021

Buying and selling a home traditionally requires significant physical effort, time, and expense to locate potential candidates, negotiate transaction terms, and process closings. Today's home buyers and sellers have access to extensive information about city and neighborhood demographic information, specific houses for sale, and market prices without leaving their homes. 

Virtual home tours are readily available, as are potential mortgage lenders. Legal documents and signatures can be captured remotely without visiting a physical office, and funds are transferred without paper checks. 

As artificial intelligence (AI) and the internet of things (IoT) becomes more commonplace, the convenience, cost, and speed of buying or selling a home will continue to decrease.

Prediction 9: The number of realtors and transaction fees will continue to fall in 2021

Approximately 5.4 million homes are sold each year by 106,548 real estate brokerage firms (The median number of sold homes per brokerage firm is 50.7.). In addition, the median gross income of a realtor in 2019 was $49,700.

A benefit of technology use is better service to real estate buyers and sellers and increased efficiency of real estate professionals, which means the same realtor will handle an increased number of listings without increased time and effort with greater efficiency. The added capability of the industry will intensify competition and lower prices for customers. 

The number of realtors may shrink significantly, the survivors being those who exploit technology to the maximum extent. Overall, the industry will become better trained with better tools and flexibility to meet changing market conditions.

Prediction 10: Home sellers will continue to have a market advantage in 2021

As a result of the considerable buyer demand compounded with low inventory, sellers have the upper hand. Prices have consistently been higher this year than last — even during the housing slowdown — and continue to rise. 
For those sellers who have been sitting on the sidelines, 2021 is an opportunity to sell your home fast, perhaps without having to make concessions for the sale to occur.

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