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Zillow predicts a stronger housing market in 2021

By Mike Wheatley | January 5, 2021

Zillow has said that it expects the for-sale housing market to gain even more strength in 2021 following an incredible run that came in the wake of the coronavirus pandemic.

Zillow said in its 2021 housing predictions that demand is continuing to grow as we enter the new year, and that this will likely surge ahead even faster in urban areas as economies start to reopen. Indeed, Zillow says that annual home sales growth will hit its highest level in almost 40 years as more financial certainty brings more sellers onto the market to cash in on the growing demand and technology makes it easier to connect with buyers.

On the downside, Zillow forecasts home price, mortgage rate and rent increases that will pose more challenges around affordability to those with less financial resources.

Demand for city living will surge in 2021

Demand for urban housing largely kept pace with the suburbs in 2020. But rent prices in urban areas softened compared to their suburban counterparts in the spring and summer as a shift in housing needs and the spike in service-sector unemployment left their mark. While it's not quite right to call it a comeback, Zillow expects demand for city living to surge in 2021.

Some of the nearly 3 million adults who moved in with parents or grandparents in the spring have already started to move back out while taking advantage of an increase in rent concessions. With COVID-19 vaccine distribution underway, Zillow expects many of those who may have left cities temporarily during the pandemic are likely to return as local economies begin to open up, and a new class of young adults will be drawn to cities as they finish school and enter the job market. Urban rental demand is likely to be boosted by the relatively soft price growth this year, easing affordability challenges, at least temporarily.

The next home shopping season will be the hottest in recent memory

Zillow expects a perfect storm of market conditions to create the hottest spring shopping season in recent memory, with sales happening quickly and often above list price. It's likely COVID-19 vaccine distribution will be well underway in the U.S. by the spring, and local economies and schools should be in the process of opening back up. Many will also have more certainty about whether their jobs will be performed remotely in the long term, adding buyers to the market who had been waiting for that to be settled. Add in expectations for mortgage rates to rise later in the year, and we could see a buyer frenzy as they look to lock in rates as low as possible.

It could also be the last of its kind

Springtime has historically been the best time to list a home for sale, but homes have continued to sell quickly through the fall and into the winter this year in what could be the end of the typical seasonal trend. The increased adoption of real estate technology has given home buyers more tools to shop from the comfort of their home, which can be done just as easily during the warmer spring and summer months as it can in the dead of winter. That's likely to lessen the traditional seasonality of home shopping as it reduces the impact inclement weather can have on things like in-person showings and open houses.

Home sales growth will be biggest since the '80s

2020 has been a remarkably strong year for the housing market, with sales on pace to grow 6% from 2019 despite essentially pressing 'pause' for a few weeks in the heart of the spring shopping season. Zillow expects that mark will be shattered next year, forecasting 21.9% annual growth for a total of 6.9 million homes sold. That would be the biggest annual sales growth since 1983i.

The optimistic outlook is due largely to the enduring strength of the market today, even through what is typically a slower season for home sales, and demographic factors that indicate demand will remain strong for years to come. Plus, about a third of homeowners considering selling in the next three years cited life and financial uncertainty as reasons they weren't selling this fall. The COVID-19 vaccine rollout and expected subsequent economic recovery should pull many off the sidelines, adding more inventory to meet the heavy demand for homes and thus creating more transactions.

Moving will be a digital-first experience

Zillow predicts increased adoption of new and existing technologies during the pandemic will make a digital-first experience the new standard for real estate in 2021 and beyond, helping to increase the pace of transactions. These innovations can connect sellers with interested buyers more quickly, keeping inventory from stockpiling to the same degree it has in the past.

Take the home shopping experience: Innovations like 3D Home tours paired with interactive floor plans and virtual tours are allowing shoppers to winnow down their options without leaving their couch -- requests for virtual tours tripled when stay-at-home orders began this spring. When it comes time to tour a home in person, self-tour technology allows shoppers to tour a vacant Zillow-owned home on their own schedule -- no more waiting for the weekend to visit open houses. And nearly two-thirds of Zillow Offers home purchases are closed digitally with a remote notary, one more convenience over the traditional home buying process.

Renters are also expected to use pandemic-accelerated technology to search, find, apply for, and lease a home all digitally in a safer, easier, end-to-end online transaction. Nearly half (46%) of renters agree that they wish more listings offered virtual tours -- since March, multifamily rental listings with a Zillow 3D Home tour have attracted 18% more visitors than those without on Zillow -- and 46% of renters surveyed would prefer to sign a lease online.

Fixing housing vulnerability will become high priority as rent prices rise

The expected surge in demand for rentals, which are more common near city centers, is expected to bring big price increases and fewer concessions from landlords. That will put many renters in a tenuous financial position after they were hit hard by pandemic-related income loss.

The rental market softened in 2020, with rents about flat nationally. In large metropolitan areas like New York, Boston and San Francisco, rents dropped for the first time in recent memory. Still, given the impact of shutdowns and layoffs on renter households, government assistance proved vital in keeping many afloat financially. Moody's Analytics estimates nearly 12 million renters will owe an average of $5,850 in back rent by January 2021, shining a spotlight on the need for eviction protections or increased cash flow for renter households, whether in the form of employment income or federal stimulus payments to avoid a painful wave of evictions.

Homes will become increasingly unaffordable for low income families

Mortgage payments have become more affordable for homeowners over the past two years thanks to ultra-low mortgage rates. Zillow expects rapid price growth and slightly higher mortgage rates to reverse that trend in 2021, so buyers contemplating a move may consider doing so sooner rather than later.

Given the expected volume of sales, hopes for an economic recovery as the COVID-19 vaccine rolls out, and the expectations for demand to continue to outpace supply, Zillow forecasts annual home value growth to reach 10.3% in November 2021 -- the highest since 2006. Mortgage rates, which hit record lows in 2020, are expected to rise. Rates are likely to remain low by historical standards and not rise enough to meaningfully limit demand, but even a small increase would affect buyers' monthly payments.

Combined, that will make homes harder to afford, especially for first-time buyers who don't have access to funds from the sale of their current home.

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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