2021 Real Estate Forecast
I think we can all agree that no one saw 2020 coming, as it relates to Real Estate or life in general. As it turned out though, Sellers saw record high prices and Buyers saw record low mortgage interest rates. So something for everyone.
For those who bought earlier in the year, they may have already seen some nice gains in their home’s value. And while we have definitely seen somewhat of a seasonal slowdown during December, I would not be surprised to see a repeat of last year’s frenzy at some point during 2021. That’s because the underlying drivers haven’t really changed. By that I am referring to:
rebalancing of housing needs
the “Great Migration”
record low mortgage interests rates
Add to that the record high stock prices, generational transfer of wealth, and a likely improving economy and return to normal as vaccines become more readily available and we have the perfect storm (in a positive way) for the Real Estate industry to be on fire for 2021.
While many economists are anticipating that inventory will go up, my feeling is that may be counterbalanced by more Buyers in the market either because they have greater job security or will now be able to get a mortgage based on loosening underwriting in regards to self employed, business owners, and gig workers.
In this post I am only going to be discussing residential Real Estate because that’s what I do.
But clearly there are many implications for commercial Real Estate. While traditional office space may be on the decline, the need for warehouse space may be greater than ever as the acceleration of years of e-commerce uptake has been condensed into months.
Also up in the air is the outcome for the hospitality business. Do hotels, and which ones, come back once we’re all on the road again. Or does the new normal boost Airbnb as travelers look to avoid traditional hotels?
And there’s no doubt that there is probably too much of or the the wrong kind of retail space.
Let’s take a deeper dive into some of the topics related to residential.
REBALANCING OF HOUSING NEEDS
Three factors that I repeatedly here from Buyers driving their decision to move are:
Working from home
Outdoor / open spaces
Move to less density (suburbs)
The work from home trend - which is anticipated to continue post pandemic, has driven the need for the extra bedroom, home office or other workspace that drives the move from 2 to 3 bedrooms or 3 to 4 or whatever the move up is.
As people expect to spend more time at home, they want to be able to easily step outside whether that is a balcony, patio or full blown backyard.
And lastly, “less dense” as opposed to urban seems to be a trend. That can manifest itself in many ways. For example, if you are in a larger building on Playa Vista or Marina Del Rey, the move to a townhouse or SFR in Redondo Beach can provide the reduction in density you are seeking.
For some people, the new housing needs are geographical, leading to….
“THE GREAT MIGRATION”
This is a pretty easy topic to grasp: people are moving out of California.
This year I have had clients leave for Nashville, Austin, Florida and other less expensive markets. And they were not all people who were just choosing to work from home elsewhere - even though that is a lot of what has been driving the migration.
Also for many who have been in their homes for 10+ years, they can cash out their equity now and possibly pay cash for their new home and live mortgage free.
To the extent that I see people moving into the LA area, and I am seeing that, they are coming from the San Francisco area or just places that are colder like Chicago or Detroit.
And let’s not forget about those…..
RECORD LOW MORTGAGE RATES
Make no mistake about this: as long as rates stay low, prices will continue to increase. As soon as they go up materially, expect market balance. If that causes more homes to be listed, the result we might even see, dare I say it, a Buyer’s market.
Let’s look at these numbers in a little more depth.
On a million dollar loan amount (think $1.25M purchase price with 20% down) the payment is going to be $4,082 or lower if someone gets an ARM, does a buy down or has a relationship with the bank (large deposits).
About a year ago, rates were maybe 3/4 to a point higher. So that’s a savings of $400-$500 a month. If we go further back, let’s say 2 years, when rates were maybe a little above 4%, the savings is over $800 month. That in a nutshell is a major driver for the price increases.
ADVICE FOR 2021 BUYERS AND SELLERS
Don’t try to time the market. If you are thinking of Buying, there’s no reason to wait but don’t feel rushed if you haven’t found the right place.
Much of what you will read about the market will not be applicable to your specific situation. While there’s certain elements of the national trends that apply, each city and neighborhood has to be evaluated on its own merits.
If you are going to list your home for sale, the worst mistake you can make is to overprice it. The second largest mistake is to make investments in improvements that will not have a decent ROI.