Top-5 U.S. Housing Market Predictions for 2021

It’s forecast season here at the Home Buying Institute. Every ear around this time, we analyze current real estate market trends and conditions across the U.S., in order to offer a forecast for the upcoming year. And there’s certainly a lot to talk about this year. So let’s get right to it.

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Here are out top five predictions for the U.S. real estate market in 2021.

5 Predictions for the Housing Market in 2021

Home prices will likely continue rising in most U.S. cities, and mortgage rates could hover within the 3% range next year. Low inventory will remain a challenge for many home buyers across the United States. Those same supply shortages will lead to steady sales and stiff competition among buyers.

Those are some of the key predictions for the U.S. housing market in 2021.

1. Home prices will continue rising in most U.S. cities.

Let’s be honest. It doesn’t take a crystal ball to issue a positive home-price forecast for the U.S. real estate market in 2021. All you have to do is examine current trends and project from there.

And the way things are going right now, it’s almost certain that home values will continue to climb next year. At least in most U.S. cities.

According to the real estate data company Zillow, the median home value in the U.S. rose by around 5.8% over the past year or so. The company’s analysts also issued a positive price forecast for the U.S. housing market into 2021.

By their estimation, the nation’s median house value will rise by around 7% over the next year or so. This particular forecast was issued in late October 2020, which means it extends into the fall of 2021.

Similarly, a recent housing market report from Realtor.com® showed that the median listing price for homes in the U.S. rose by 12.9% in the first week of October, compared to a year earlier.

The chart below shows Zillow’s home value index (a proprietary measure of the median price point) over the past ten years or so. You can see where prices bottomed out, in late 2012, following the last housing market crash. You can also see the steady upward trend that has occurred since then.

The company’s forecast for the U.S. real estate market is shown in the green shaded area to the right.

Chart: Home values over the past decade | Source: Zillow.com

If you were to look at this chart and nothing else, you wouldn’t even know a global pandemic and national recession had taken place. Much to the surprise of analysts, the nation’s housing market has chugged along as if things were normal.

The chart above reflects the nation as a whole. But when you drill down to the local level, home-price trends are much more varied. In some U.S. cities, home values might level off a bit next year.

Still, we anticipate that most local housing markets across the United States will continue to appreciate throughout 2021. Some cities could even see double-digit price growth over the next year or so, especially those with very low inventory.

2. Housing market inventory will remain tight in 2021.

According to data collected by the National Association of Realtors and other sources, housing market inventory in the U.S. declined steadily in 2020.

In this context, “inventory” and “supply” refer to the number of homes listed for sale at any given time. And that number is much lower today than it was a year ago.

An October report from Realtor.com® revealed that housing market inventory is down considerably across the United States:

“Total inventory remains down 38% year over year. Although the total number of homes available for sale continues to shrink, the market has seen five consecutive weeks of steady or improving decline — another factor signaling that the balance between supply and demand is stabilizing.”

Economic uncertainty is one reason for low inventory levels within the real estate market. A recent survey conducted by Zillow’s “Population Science” team found that many homeowners who are planning to sell within the next three years feel that things are just too uncertain right now. They also see themselves getting a higher price down the road, if they wait a while.

Our housing market forecast for 2021 predicts a continuation of these trends, at least into the first part of the year. As we get into the spring of next year, we could see things loosen up with more homes coming onto the market.

Home buyers entering the real estate scene next year should allow plenty of time for house hunting. It’s also important to be flexible and open-minded, when it comes to the location and features you want in a home. It’s rare to get everything you want when inventory is tight.

3. Home sales will remain steady going into next year.

Housing demand among home buyers in the U.S. has been surprisingly strong since May of this year. The real estate scene slowed to a crawl during April, as the coronavirus got a firm foothold in the United States. But since then, sales activity has increased steadily and significantly in most cities.

In its quarterly forecast for the U.S. housing market, the research team from Freddie Mac wrote:

“There was a sizeable increase in total home sales, with strong monthly showings from both new and existing sales. In August [2020], new homes sales surpassed 1 million units at an annualized rate, the highest since Q2 2006…” 

The robust sales activity mentioned above is partly due to the industry’s ability to adapt. Mortgage and real estate companies in the U.S. have adopted digital procedures that minimize the need for face-to-face contact. These days, all of the paperwork associated with a home purchase and mortgage loan can be conducted electronically.

This has helped sustain the U.S. real estate market at a time when other aspects of the economy are faltering.

In 2021, we expect home sales to continue at a strong pace, especially when the weather starts to warm up in the spring.

4. Mortgage rates will hover around 3% next year.

The following housing market forecast comes from the economic research team at Freddie Mac. If you’re not familiar, Freddie Mac is the government-sponsored corporation that purchases home loans from lenders, securitizes them, and sells them to investors via the secondary mortgage market.

In their latest forecast for the U.S. real estate market and housing industry, Freddie Mac predicted that the average rate for a 30-year fixed mortgage loan would hover around 3% during 2021.

To quote that report:

“Given weakness in the broader economy, the Federal Reserve’s signal that its policy rate will remain low until inflation picks up, and no signs of inflation, we forecast mortgage rates to remain flat over the next year. From the third quarter of 2020 through the end of 2021, we forecast mortgage rates to remain unchanged at 3%.”

Three percent would be a slight increase from where we are right now. As of October 22, 2020, the average rate for a 30-year fixed home loan was 2.8% (an all-time record low, to date).

Mortgage rates over 3 years
Chart: Average 30-year mortgage rates | Source: Freddie Mac PMMS

The chart above shows the average rate for a 30-year fixed mortgage (the most popular financing option in the U.S.) over the past three years. You can see how that average has dropped steadily since 2018.

Economists from the Mortgage Bankers Association offered a similar forecast in October. They expect 30-year mortgage rates to average around 3.1% during the first two quarters of 2021, and inch upward to 3.2% during the latter part of next year.

Our prediction is that low rates will continue to sustain the U.S. housing market as we close out this year and move into 2021. Low interest rates have also led to a refinancing boom, and that too could continue into 2021. So let’s talk about that trend next.

5. It will be another good year for refinancing.

This past year has been a boon for homeowners in the U.S., as far as mortgage refinancing goes. The record-low interest rates mentioned earlier have spurred many homeowners to refinance their existing home loans.

But there are still millions of homeowners in the U.S. who could benefit from refinancing, thanks to the generally downward trend in mortgage rates.

According to the mortgage technology and research firm Black Knight, there are currently more than 18 million homeowners in the U.S. who could substantially reduce their monthly savings by refinancing their existing home loans.

The bottom line: In most local real estate markets across the U.S., sellers will continue to have the upper hand in 2021, due to tight inventory conditions. Home prices will keep climbing in most parts of the U.S., and borrowers will continue to enjoy low mortgage rates throughout next year.

Disclaimer: This article includes predictions for the U.S. real estate market into 2021. Economic and housing forecasts are the equivalent of an educated guess and should be treated as such. No one can predict future real estate trends with complete accuracy.