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Another Banner Year or Start of a Drop? The 2021 U.S. Real Estate Market Outlook

Feb 8, 2021 | Market Commentary

The challenges of 2020 were numerous and seemed unrelenting at times. It was difficult to find the silver lining in a year full of grey clouds. That said, there were a few bright spots in the financial world. The three major U.S. stock indices were all positive for the year as well as the domestic real estate market. Despite the headwinds of COVID, high unemployment, and strained budgets, real estate values continued to push higher with low inventories and historically low-interest rates helping to fuel the fire. The housing market will correct at some point, as all markets do, but will 2021 be the beginning of the drop or another banner year? 

A Brief Recap of 2020 

The U.S. real estate market posted another strong year of sales in 2020. The energy from 2019 continued right on through the majority of 2020. Due to COVID ramping up in the U.S., the first quarter and the beginning of the second quarter forced real estate professionals to adjust from in-person showings and open houses to a more virtual environment. Buyers adapted well to these changes and continued their frenetic pace. Attractive interest rates and low inventories created the perfect environment for sellers to receive top value for their homes.     

The Factors That Could Derail The Housing Market

The landscape for the 2021 real estate market looks quite encouraging, according to many of the experts in the industry. There are a few factors that will have a significant impact on the real estate market. These three factors are especially important because any one of them could be the impotence for a market cool down: 

1. COVID – We have all adjusted our lifestyles to best protect ourselves from the pandemic by reducing contact with others, limiting our travel, and wearing masks. However, if the pandemic really begins to accelerate or a new strain is introduced and causes panic, we could see people limit their exposure events further. Furthermore, if job losses increase, this could make potential buyers and sellers pause any housing activity. This could have a big impact on people’s willingness to go through the buy/sell process.

2. Remodeling – The “new normal” of working remotely and being more self-sufficient at home is creating a perfect environment for people to remodel their existing homes to better fit this lifestyle. People are renovating kitchens, finishing lower levels, and adding offices and workspaces to adapt. This runs counter to the idea of selling a current home and upgrading to a home with those features already in place. The demand for remodeling will likely create the momentum for another positive growth year in that sector.

3. Jobs – The U.S. economy has struggled with high unemployment as a result of the pandemic. Typically, high unemployment will absolutely slow down the real estate market, however, the housing demand stayed strong throughout 2020 in spite of high unemployment. That said, if the unemployment numbers worsen into 2021, then housing may start to feel the effect. 

The Tailwinds That Could Power The Market Through 2021

1. Housing Inventory – For the majority of markets in the U.S., the number of houses on the market isn’t enough to satisfy the number of people looking to purchase a home. This imbalance has helped to push values higher and keep the real estate market momentum strong over the last few years. However, if this imbalance corrects itself by a jump in new construction or more people deciding to sell their homes, the market would adjust and values would flatten out. The chief economist at Realtor.com is predicting new home starts will be up 9% in 2021. However, it doesn’t seem likely to slow the demand in 2021 as both of those variables take time to influence the market.

2. Interest Rates – Mortgage rates have been trending down over the last 2+ years as the 10-year Treasury yield continues to fall. The relationship between mortgage rates and the 10-year treasury is quite strong and has been decades. The friendly interest rate environment being utilized by the Fed is likely to continue, at least into, if not through the year 2021, which will keep mortgage rates at or near all-time lows. This is a huge motivating factor for buyers looking to purchase a home.

3. COVID Vaccines – While the initial rollout of the COVID vaccine is running at a slower pace than what was predicted, the experts believe that we will be back on track within the next month or two and hopefully have the majority of Americans vaccinated by mid-year. This could go a long way to instill confidence in the general public and provide additional fuel for an already hot real estate market, especially if real estate professionals can resume in-person showings for the late spring and summer months. The summer months could be phenomenal if consumer confidence accelerates. 

Outlook for 2021

Barring any unforeseen circumstances, as we all struggled with in 2020, the trends are leaning towards another strong year in the real estate market. We are likely to see the tailwinds mentioned earlier prevail for the entirety of 2021 and demand should continue at the previous year’s pace as a result of not enough inventory. Real estate markets, especially in the Midwest, tend to correct slower than the stock or the bond markets. The coastal markets in the U.S. do move faster and will be more susceptible to unpredictable events; however, the momentum is still strong across the country. The variables are in place for demand to outpace supply and attractive financing options to continue for at least 12 more months.

Nate Condon

2021 INVESTMENT & OUTLOOK GUIDE

This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.