The housing market is in a tricky situation given massive unemployment, continued shelter-in-place, the coronavirus, and tremendous uncertainty. However, after a massive 44% month-over-month rebound in U.S. pending home sales in May and another strong 9.6% rebound in October, November, and December, the U.S. housing market shaping up to be quite strong! Here are my housing predictions for 2021.
In a nutshell, I am bullish on housing in 2021. The S&P 500 closed up 16% and the NASDAQ closed up 42% in 2020. As a result, investors are much wealthier today. Some of this money will flow into real estate.
Further, with interest rates down, the value of rental income has gone way up. It now takes a lot more capital to produce the same amount of risk-adjusted income. Therefore, I’m a buyer of rental properties because prices have not risen to appropriate levels yet.
Finally, we’re all spending a lot more time at home. Therefore, we value our homes more. We’re looking to upgrade our living space with larger square footage, more decks, views, and outdoor space. I see a multi-year upgrade cycle in the mix.
Housing Makes Predictions 2021
With at least two viable vaccines with a ~95% efficacy rate from Pfizer and Moderna, low mortgage rates, an accommodative Fed, and huge pent up demand, I think the housing market will continue to reach new highs in 2021.
Record-low mortgage interest rates are enabling homebuyers to afford more home. In the past, I would say spend no more than 3X your annual income on a home. Today, you can stretch to buy a home up to 5X your annual income due to mortgage rates.
Further, we are all spending more time at home. As a result, the intrinsic value of a home is going way up. We also desire to invest in a more stable physical asset that generates strong cash flow. Finally, we have the millennial generation in their prime home buying years.
Given my housing market prediction, if you’re looking to buy a home and can afford to do so using my 30/30/3 home buying rule, buying property before we reach herd immunity is probably going to turn out well. Just make sure you live/own your own for at least 5 years, if not 10+ years. The longer your holding period the better.
The Return To Big City Living
For big cities like New York City and San Francisco, I believe there will be a V-shaped recovery in demand in 2021 as hundreds of thousands flock back to big city living again.
All of my wealthiest and smartest friends are buying up San Francisco property before 2021 to position themselves for such a rebound. Further, the value of rental income has gone way up because interest rates have come way down. It takes a lot more capital to generate the same amount of risk-adjusted income. Therefore, smart investors are buying up rental properties as well.
Here are more detailed thoughts about my housing market predictions for 2021.
More Detailed Housing Market Predictions For 2021
Before we get in more detail about my housing market predictions for 2021, let’s first go through the negatives that could drag the overall housing market down.
1) Double-digit unemployment rate.
At one point, over 30 million Americans have filed for unemployment. As a result, the unemployment rate has skyrocketed to 15%+. When people are unemployed, they aren’t looking to buy homes. They’re looking to protect what they have.
Thankfully, millions of Americans received enhanced unemployment benefits of $600/week until July 31, 2020. However, these benefits have run out, and it is uncertain more than four months later, whether there will be another stimulus package before 2021.
2) Delinquency rate.
When the unemployment rate was surging, the delinquency rates on auto loans, credit card loans, and mortgages were also surging. A higher delinquency rate makes banks more hesitant to lend as losses mount. Thankfully, delinquency rates are slowly going down in 2H2020.
3) Tighter lending standards.
Banks learned their lessons from the 2008-2009 financial crisis and have tightened lending standards since then. However, banks are further tightening lending standards because they also are unsure when the economy will recover.
If it’s hard to get a mortgage, it’s harder to buy a home. I’ve talked to several mortgage lenders in depth about the state of the mortgage industry. They all say that getting a jumbo or super jumbo loan poses more difficulty
Banks are requiring 20% or greater down payments and 720 or higher credit scores for a jumbo loan. As for getting a conforming mortgage loan, it’s still OK as Fannie Mae and Freddie Mac are still buying because the government is supporting them.
4) Open houses are not fully open yet.
Once shelter-in-place began in mid-to-late March 2020, open houses were shut down. Even in October, open houses are mostly by appointment only.
When you can’t get loads of people in the door, it’s hard to trigger the emotional desire to buy. Without emotional buying, properties have a harder time getting into a bidding war.
Looking at homes virtually is nice. But if you are going to spend hundreds of thousands or millions of dollars on a home, you want to go inside and feel the presence of the home first.
5) People wanted to hoard cash, now they want to splurge.
When there is uncertainty, most people tend to just hoard cash until all signs are clear. Below shows the massive spike in the U.S. personal savings rate in April 2020 to 33%. However, the personal savings rate has gradually declined over time as Americans have become more comfortable with the future.
Now, there is massive pent up demand to spend cash in 2021. Everything from cars, to services, to travel, to nicer homes will be in huge demand. Millions of people are itching to spend more and improve the quality of their lives. Upgrading to a nicer home with more space and an ideal layout is priority #1.
Reasons For A Housing Price Recovery In 2021
Now that we understand some of the headwinds, let’s look at the upsides to housing prices for 2021. My housing market prediction for 2021 is that nationwide housing prices will continue to reach new all-time highs.
In fact, my housing market predictions for 2021 is for the fastest home price appreciation since the previous financial crisis. We could potentially see a 10% YoY in housing price growth in 2021, especially after slow price growth in 2019 and the first half of 2020.
The median price of an existing home sold in October was about $320,000, up an incredible 7.4% compared to a year ago.
Below is the latest data on the median price of existing home sales. Notice the continued upward trend in all of 2020.
The pace of price increases will likely slow down, as demand from the fist half of 2020 gets exhausted. The winter of 2020/2021 will likely be slow given a surge in coronavirus cases as well.
However, due to the following reasons below, I believe U.S. national median home prices will likely continue to reach new highs. My prediction is for a $330,000 median price by end of 2021. Here are the reasons.
1) Mortgage rates will remain low.
If housing prices decline by up to 5% over the next 12 months and mortgage rates continue to remain low, housing affordability goes up. When affordability goes up, more people will buy property. This is the Yin / Yang of finance.
Given the demand for U.S. treasury bonds is high in a uncertain environment, bond yields will remain low. There is also little-to-no inflation with so many people out of work. Everybody should at least refinance their mortgage now to save.
Check out Credible, my favorite mortgage lending marketplace where lenders compete for your business. Mortgage rates have fallen to all-time lows. I was able to get pre-approved for a 7/1 ARM jumbo at only 2.125%!
2) Tremendous government support.
The government has committed to doing everything it can to help the American public stay afloat during a global pandemic.
The government passed a second round of stimulus to be injected into the system in 1H2021. This second round of stimulus will hold millions Americans through until there is herd immunity. There should be easing of PPP forgiveness rules, and large government works initiatives to put Americans back to work. Being able to deduct your PPP loan in 2020 is a huge new big win for small businesses.
Below is a map highlighting where the enhanced $600/week unemployment benefits go farthest. Notice how $600 is worth between $645 – $700 in states such as ND, SD, NE, KS, OK, MI, AK, MO, IN, AL, OH, KY, and WV.
This map shows why investing in the heartland of America is likely a strategically sound move. There’s never going to be a federal tax or federal stimulus package based on various cost of living levels by state. Therefore, you might as well play along instead of fight the government.
On the other hand, if there is a Blue sweep, the nation should expect massive government stimulus in 2021.
3) The increased desire to invest in a stable asset class.
Unlike stocks, real estate values don’t just go *POOF* overnight. When the stock market is weak, there is a tendency for capital to flow towards the safety of real estate. The sweat spot for real estate is when stocks are down ~10%, as is currently the case. Mortgage rates are low and stock money shifts to real estate.
Real estate provides shelter, is a tangible asset, is a defensive asset, and can generate income. With the desire to relocate to less densely populated areas of your own city or country, the desire for real estate should continue to be quite strong.
4) A permanent surge in the work from home trend.
Now that tens of millions of people have experienced working from home for months, the trend is likely to continue forever. Working from home is more efficient. As a result, productivity also increases. I believe there will be a permanent desire for employees to work from home 2-3 days a week and companies will allow it to retain employees.
With more people staying at home, the value of a home goes up. Any time you use something for a longer period of time, you care more about that thing.
People want to buy homes with views, more land for their children, and homes with home offices. People want to buy homes that are in less densely populated areas of their city or in a different state.
Therefore, expect to see more capital invested in real estate. Below is a picture of my home office, located on the western side of San Francisco. I’ve always wanted to write while looking out into the ocean.
5) The desire to get busy living now.
If the global pandemic has taught us anything, it’s that tomorrow is not guaranteed. Therefore, there will be a large demand curve shift with renters looking to finally buy a nicer place to live. You will see frugal homeowners wanting to upgrade their living standards as well.
Millions more people are deciding whether it’s best to keep hoarding cash or actually spend their cash on a better lifestyle. Do you really want to live like a pauper for the next several years? After locking down expenses and saving so much during shelter-in-place, I’m personally looking to spend my money.
6) Pent-up savings.
Just like how a massive increase in the personal saving rate may be throttling housing demand, eventually, the savings will be unleashed onto the world. We are seeing the saving rate go down as Americans spend more money. This trend will likely continue and explode higher once there is a vaccine available to the masses in 2021.
This latest financial crisis is more of a suppression, instead of a depression. Consumer demand is being artificially depressed due to shelter-in-place orders and forced closures of businesses. As time goes on, I have no doubt the U.S. personal savings rate will go back to the historical range of ~6% – 7% pre-pandemic.
If you look at many other demand charts for 2H2020, you are seeing a V-shaped recovery. In such a scenario, my housing price prediction for 2021 will prove to be conservative.
Below is the latest Chase consumer credit card spend that shows a continued rebound. Notice how online spending (card not present) really surged higher in late October during the Amazon Prime period.
Zillow’s Housing Market Predictions For 2021
Now that I’ve shared my housing market predictions 2021 as a 20-year real estate veteran, let me share Zillow’s. Zillow is one of the largest online real estate companies with a wealth of data. Below is their housing market predictions for 2021.
Zillow’s base case scenario is that home prices will fall by 2%-3% in 2020 and get back to all-time highs sometime in mid-2021. So far, Zillow is wrong like Donkey Kong as U.S. median home prices in 2020 continue to surge higher.
If we are to believe Zillow’s housing market predictions for 2021, then we’ve actually got only until about March 2021 to hunt for real estate deals. This is their base case scenario. But again, home prices are not falling, but rising.
There were deals to be had in 1H2020, but deals are now getting a little harder to find. To find deals, you may need to look at homes priced more than 50% higher than your city’s median home price.
The Best Ways To Invest In A Housing Recovery
Here are three real estate buying strategies to consider based on my housing market predictions for 2021. The goal is to always get the best deal possible.
Real Estate Buying Strategy #1
The easiest strategy to invest in a housing recovery is to invest in real estate within your own city. Buy real estate in less centrally located areas that is less dense, has lower prices, and still great attributes like an ocean view.
The work from home trend means commuting long distances is no longer as big of an issue. Further, by living in your same city, you won’t have to take a salary cut. Some companies have explicitly said that if you want to relocate to save on living costs, you will also have to accept a salary cut.
I’m personally buying as much ocean-view property on the western side of San Francisco as possible because I think it is undervalued. Given the west side is mostly zoned for single family homes, the area is less dense as well.
Drive around your city to find new areas that were once overlooked because you desired a shorter commute.
Real Estate Buying Strategy #2
The second way to invest in a housing recovery is actually even easier and potentially more lucrative.
Take advantage of real estate platforms such as CrowdStreet to diversify your investments across America. CrowdStreet is an easy way to invest in real estate without the need to get a mortgage and leverage up.
What’s great about CrowdStreet is that they are focused on 18-hour cities, secondary markets that have lower valuations and potentially higher growth rates.
You could buy publicly-traded REITs, however, like the S&P 500, REITs have rebounded tremendously since their March 2020 lows. Further, publicly-traded REITs have shown to be even more volatile than stocks.
Since 2016, I’ve personally invested $810,000 in real estate crowdfunding to invest in lower-cost areas of the country with higher rental yields. The income earned is also 100% passive. Unlike buying physical property, I don’t have to take on a mortgage or maintain the property.
Another favorite real estate crowdfunding platform is Fundrise. It is the leader in private eREITs that offer tremendous diversification and steady historical returns in the face of volatility.
If you would rather invest in a diversified fund, rather than individual deals, Fundrise is a good solution. Fundrise is available for non-accredited investors. Fundrise is free to sign up and explore.
A Demographic Shift Is Real
There is clearly going to be a demographic shift towards cheaper cities, especially now that work from home is more widely accepted.
For example, you are seeing New Yorkers buy property in Connecticut and Florida. I expect this trend to continue for decades.
In addition to investing in commercial real estate where demographic trends will be strong, investors should also consider investing in data-centers and self-storage commercial real estate. Interest in commercial real estate where fewer humans are involved seems to be quite high for obvious reasons.
Below is an example of a CrowdStreet offering in the self-storage space.
Real Estate Buying Strategy #3
Given interest rates have collapsed, the value of rental income has gone way up. In other words, you now need a lot more capital to generate the same amount of income.
As a result, it is strategically sound to buy rental properties due to their cash flow. Rental property prices have not risen as fast as the rise in the value of its rental income. In fact, some rental property valuations have gone down in big cities as rental prices have declined.
But if you believe in a V-shaped recovery in big cities, there are opportunities to be had in buying rentals.
Real Estate Buying Strategy #4
You believe in my housing market predictions for 2021, then you should also invest in multifamily properties. Multifamily properties and other commercial real estate have lagged the stock market and single family home prices so far. However, multifamily properties will likely outperform in 2021 after there is a vaccine.
CrowdStreet is focused on sourcing attractive multifamily properties for investors to take advantage of the boom. I’d check them out.
Real Estate Is A Great Asset Class
Real estate is my favorite asset class to build long-term wealth for most Americans. It’s easy to understand, less volatile, provides shelter, and produces income.
Although we are living in difficult times now, we should also look to take advantage of any weaknesses in the housing market. Over the long run, real estate tends to do well over time.
As always, please run the numbers and only buy what you can afford. Leverage is great on the way up, but dangerous on the way down. Not having to leverage up is one of the reasons why I like investing in real estate crowdfunding. However, as always, there are no guarantees with any investment.
Best of luck with your real estate investing! I feel strongly about my housing market predictions for 2021. As a result, I am investing accordingly with ~40% of my net worth in real estate.
If you’d like to keep in touch, you can sign up for my private and free Financial Samurai newsletter here. Real estate is my favorite asset class to build wealth.