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If you are hoping to jump on historically low interest rates to purchase a new home in 2021, you may find yourself paying extra for the house of your dreams. The 2021 housing forecast calls for record-high home prices to continue to climb.
A COVID-19 era surprise
As the novel coronavirus began to spread across the globe, few would have predicted that homeowners hoping to sell would fetch premium prices for their properties. It was astonishing for two reasons: The limited way real estate agents could conduct showings due to health concerns and the number of businesses that shuttered as the pandemic raged on.
Several factors allowed real estate to flourish while other sectors of the economy languished:
- The Federal Reserve knocked the federal funds rate so low that banks could borrow from each other at rock-bottom rates. In turn, they were able to offer low rates to their mortgage borrowers.
- With fewer people willing to sell their homes during the pandemic, inventory dropped. Tighter inventory led to greater demand, and in turn, higher prices.
- The National Association of Realtors quickly adapted to what appeared to be an industry-smashing pandemic. The safety protocols they put in place made home sellers and home buyers alike feel better about carrying on with business as usual.
How high will prices go?
Buyers can expect price hikes of 4% to 5% in 2021. While that's not great news for those in the market for a home, it is better than the double-digit hikes we saw in 2020. And while low interest rates can lead to lower mortgage payments, the real problem for buyers -- particularly first-time buyers -- may be the demand for a larger down payment. With very low interest rates come more buyers competing for available inventory. That competition leads to bidding wars, often won by the buyer with the most cash and least contingencies.
What about interest rates in 2021?
As of this writing, the 30-year fixed rate on a conventional Freddie Mac loan is under 2.8%. The Mortgage Bankers Association predicts that mortgage rates will tick up throughout 2021 but still end the year at near-record lows -- somewhere around 3.3%.
The silver lining for home buyers
Even if the interest rate rises to 3.3% next year, that's still attractive. And here's where things get good for buyers: History has shown us that there's a limit on how much home prices can escalate. At some point, income growth does not keep pace, and home values even out or begin to fall.
Sellers who become buyers
For those selling their homes in 2021, the amount they receive may feel heady. However, if they plan on purchasing another home, they're walking into a smoking-hot market. Like any other buyer, the property they consider is likely to be more expensive than expected. They may also find themselves bidding against other buyers.
It's yet to be seen how well the U.S. will recover once a COVID-19 vaccine is widely available. Further, we have no idea how well the economy will rebound once President-elect Joe Biden is in office. The prospect of a double-dip recession is not out of the question, particularly if unemployment remains high and businesses have trouble finding their feet.
But Americans are nothing if not optimistic. In the event we're able to crawl out of the current recession and get people back to work, there's no reason to expect anything but sunny skies for homeowners looking to move on. Especially if they have enough cash in their pockets to compete for another house in the current landscape.
