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Predictions from ULI’s 2021 Housing Market Outlook

Post-pandemic buyers have more savings than ever before, more options for where they can live and work and many want to move, but painfully low for-sale inventory levels continue to plague the housing market. What will that mean for the market outlook as we head into the spring/summer buyer season and beyond? 

Zonda Chief Economist Ali Wolf, a keynote speaker last week at the Urban Land Institute Terwilliger Center’s 2021 Housing Opportunity Conference, said that Zonda predicts that the low inventory issues won’t be fixed overnight, but several other positive factors should keep the housing market outlook strong, even as the industry sees major shifts in certain buyer and seller needs. ULI also released its 2021 Home Attainability Index at the conference.   

“Everything we used to know is getting broken”

The pandemic has upended certain trends, presented new challenges and created a slew of emerging markets, Wolf said. Price growth in certain markets is off the charts in all three tiers—luxury, move-up and entry level—and appreciation is basically increasing at the same rate in all three, as well. This is a unique growth curve that creates an opportunity for existing homeowners who are looking to move up in their home purchase, especially those who have paid off some of their existing mortgage. 

“Historically, the bottom tier, the lowest price point … generally has more home price appreciation because of the larger buyer pool,” Wolf said. “We’re seeing now that basically everything we used to know is getting broken, because now all three of these groups are basically moving together, up nationally eight to 9% year over year.” 

Record low interest rates have been and will continue to be a game changer for some buyers in the 2021 market outlook, according to Wolf. Buyers who see that homes in their area are significantly more expensive this year than last worry they can’t afford a home. But over the last year, as interest rates fell from 3.5% to 3%, depending on the market outlook, buyers can save between $75 and $200 per month.

“As we look at home prices, the first thing we have to acknowledge, as industry professionals, is that monthly payments matter,” Wolf said. “We’re looking at Orlando’s home prices and the interest rate. What we see is today’s monthly payment in Orlando, even after prices have gone up so much, is equivalent to 2017 levels.”

Wolf’s assertion is that reduced interest rates are “turning back time,” allowing buyers to get into homes at a monthly payment rate that’s lower than they’ve seen in nearly four years. 

The good news 

People are bringing personal savings to home sale transactions because of the pandemic Wolf said. They’re also coming with more equity in their existing homes, which will affect the market outlook into the spring/summer buying season.

“Last time we had a 2.5% savings rate going into the Great Recession, and this time we had an 8% savings rate,” she said. “When COVID hit this jumped to 35%.”

After 12-plus months of lockdowns and quarantines, closed businesses and eating in, Americans have amassed 12 months of historic levels of personal savings, Wolf said. In fact, Zonda data indicates that 60% of Millennials saved more money in 2020 than in 2019. In a survey, Millennials who were asked, “If you have saved more money this year compared to last, what are you doing with your savings?” 

  • 54% – Keep saving as much as I can
  • 43% – Use it as a down payment on a house

Wolf said that research indicates that most Millennials haven’t yet bought a home due to overall affordability issues and trouble coming up with a down payment. 

“Well, here you go. You have a year of forced savings, three stimulus checks, and 18 months of student loan forbearance,” Wolf said. “This is really impactful, for the largest living generation, the most active shopper.” 

Most active markets/buyers

Zonda research found there are seven main types of buyers who are currently the most active: first-time, move-up, luxury, retirees/55+, investors, second home buyers and relocation buyers. Of those groups, pandemic-related relocation buyers are the third most active (behind first-time and move-up buyers). In some markets—Bakersfield, Calif.; Myrtle Beach, South Carolina; Knoxville, Tennessee; and Bend, Oregon among them—more than 60% of all home searches were from out of market, according to Redfin data.

“Relocation, and the ability to live wherever you want, at least for now has been a huge, huge game changer for housing, across the country.” Wolf said. “Something that wasn’t as prevalent a year or longer ago.”

Some companies, The Goldman Sachs Group, Inc., for example, plan on reopening offices as vaccination rates increase. Other companies have decided to allow their employees to remain remote. Either way, Wolf said the pandemic has made it so workers are going to expect more flexibility moving forward, possibly in the form of working from home two or three days per week, and that likely won’t change.

“This ability to work from home has really turbo-charged the housing market,” Wolf said. 

Buyers, 30% of them, according to Wolf’s data, want dedicated office space, larger homes and homes with more rooms. They all also want affordability.”

This shift to larger homes and more space presents an opportunity, especially under the weight of such tight inventory, in many metro markets across the country where buyers are increasingly looking farther away from their metro area’s central business district. In fact, 70% of the best selling homes in metro areas across the country are more than 30 miles from the central business district. 

“You’re seeing this across different markets, across different geographies, and that is a shift from what we were seeing last year.”

When searching for new inventory, Wolf says that with buyers’ location needs shifting to locations farther away from CBDs, interest in suburban areas could continue to ramp up, assuming that there’s some sort of permanence to the shifting desire that WFH has allowed over the last year.

Predicting the end of the “prisoner’s dilemma”

Homeowners want to sell, and buyers want to buy, but Wolf says with dismally low inventory levels, each is faced with the “prisoner’s dilemma”—the game theory paradox in which two individuals each working in to further their own self-interest do not produce the optimal outcome for either party. 

Wolf predicts increased vaccine delivery could help people become more comfortable with allowing unfamiliar people in their homes during the selling process, increasing overall inventory rates. She thinks home appreciation rates leveling off and consumers’ continued commitment to a lifestyle or location change. 

Wolf predicts that the 30-year fixed mortgage rate will average 3.2% throughout 2021, and said the highest rate prediction she’d heard from other reputable companies is 3.5%. 

The risks Wolf sees to market growth over the next 12 to 18 months include continued increasing home prices, which will price out sections of buyers; people opting to spend their money on other goods and services rather than home purchases; the shortage of land supply and the cost of construction materials; and the end of student loan payment forbearance. On the other hand, Wolf said the healthy stock market, record high savings rates and stimulus money acting as both “stimulant and preservation tool” means that the bottom half of the economy “should come alive” by the middle or end of 2021.