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Ask Brian: Will 2021 be a Good Time to Buy a House?

By Brian Kline | December 31, 2020

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

Question from Bethanny in WA: Hello Brian, the 2020 housing market has been afflicted with low inventory, rising home prices, endless bidding wars, and of course the coronavirus. It’s been nearly impossible for some would-be homeowners to get their foot in the door. Will 2021 be the same? Or, will it be a good time to buy a house?

Answer: Hello Bethanny. There is never a crystal ball but contemplating the near-term future is time well spent. The two biggest variables going into 2021 are probably the future of the coronavirus and the significant change in the presidential administration. Both will drive economic changes for the next six months or longer.

What we do know right now is that despite a weak economy and major changes in federal policy about to unfold, the few homes that do come on the market continue to be snatched up within a few days. If the time line for the vaccine goes as planned, it’s likely to be at least late spring before any meaningful economic recovery begins. At a minimum, that means interest rates will remain low for at least six months. More likely, interest rates will remain very low throughout the summer and into the fall of 2021.

The biggest variable will probably be employment levels that will determine the number of buyers chasing the limited number of homes on the market. Considering that house inventory is down 34% from the same time in 2019, I don’t think we can expect that inventory will increase by any meaningful amount during the first nine months of 2021. Very significant is how low inventory levels have remained during the pandemic and economic slow-down.

Any uptick in inventory is almost certain to be gobbled up very quickly as the economy improves and interest rates remain low. So that is a negative cancelling a positive going into the New Year. Low-interest rates will keep home purchases affordable but there won’t be much to purchase. Bethanny, if that sounds like more of 2020, it’s because it is more of 2020. But 2021 will have more buyers in the market place as the economy recovers (again, watch the unemployment numbers for more clarity as the New Year unfolds).

There will be another important snag for people that are on-the-edge of being able to qualify for a mortgage. Because limited inventory means lenders will be approving a limited number of mortgages, lenders will be able to cherry-pick the ones they approve. For barely qualified buyers, this means the qualifying standards will be strictly enforced and borrowers on the edge are at risk of slipping backward. Also, home prices will continue climbing at double-digit percentages in 2021. The other negative consequence to barely qualified people will be bidding wars that price houses above their qualified limit.

In a nutshell, low-interest rates and slowing of the pandemic will bring more buyers to the marketplace but there will still not be enough houses for sale. This can be expected to continue until substantially more new houses are built. According to the U.S. Census Bureau, new building permits for October and November are only up marginally from earlier this year and 2019. Even if significant new construction begins in the next couple of months (unlikely), it won’t create an increase in inventory until at least late 2021.

Bethanny, the best buyer’s strategy for 2021 is to be as prepared as possible. Expect bidding wars. You must have your financing preapproved and be working with a lender that will close the deal quickly. Your strategy should be bidding on houses that are below your mortgage-qualified limit so that you are able to participate in a bidding war. Sellers will look at the price offer but they will also look to see whether one buyer has an easier path toward closing than the other competitive offers. The seller shouldn’t know the maximum that you can (or want) to pay but your agent needs to know that you are willing to go higher.

Also, have a plan for what compromises you are willing to accept. Higher deposits, full-price offers, and escalation clauses will remain common in 2021. Not common, but what some buyers are beginning to do is waive appraisal and inspection contingencies to make their offers more attractive to home sellers. You should think long and hard before waving the inspection contingency. Waving the appraisal is very dangerous because your lender is going to insist that an appraisal be done before giving final approval for your loan. If you wave the appraisal in the purchase contract, you’ll have to come up with cash to cover any amount between the purchase price and the appraised price. If you can’t cover the difference with cash, you will lose the high deposit. None of this works in favor of buyers. Some are going as far as allowing sellers to continue living in the house after closing, often until the seller can close the deal on the next house they will be buying.

One good thing that has come out of the pandemic is that many lenders now have processes in place to electronically sign loan applications and closing paperwork, including notarizing paperwork electronically. You want to take advantage of this to speed up your final loan approval and closing.

Bethanny, the bottom line is that 2021 is going to be at least as challenging for buyers as 2020 was and maybe even more. It will be a good time to buy a house but challenging to find what you are looking for.

What does your crystal ball say about buying a house in 2021? Please comment.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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