In 2021, mortgage rates will rise from record lows, home-price gains will slow and Americans will continue their migration to less dense regions and lower-cost housing markets.
That’s according to housing experts who spoke during a virtual conference of the National Association of Real Estate Editors.
Trend 1: Mortgage rates will edge up in 2021
Mortgage rates have fallen to record lows. However, as the economy improves and the coronavirus pandemic fades, rates will trend up, housing economists say.
The National Association of Realtors expects mortgage rates to average 3.1 percent in 2021, up from 3 percent in 2020. The Mortgage Bankers Association says rates will average 3.3 percent in 2021.
That means the refinancing boom of 2020 should slow dramatically by the second half of 2021, says Michael Fratantoni, chief economist at the Mortgage Bankers Association.
However, the refinancing window won’t close entirely. Some 20 million Americans have loans at rates higher than 4 percent, says Frank Nothaft, chief economist at real estate data firm CoreLogic. He expects many of them to refinance in 2021, even if rates tick upward.
Trend 2: Home prices will keep rising, but not as quickly
Home values have soared this year, a result of rock-bottom mortgage rates, limited supply of homes for sale and strong demand.
Housing economists expect price gains to slow in 2021. CoreLogic reports a 7.3 percent gain in prices nationally in the 12 months ending in October. That pace should cool to 4.1 percent in 2021, Nothaft says.
NAR expects home price gains of 3 percent in 2021. The sharp rise in home prices this year has created renewed fears of a tightening squeeze on affordability.
“I just hope home price increases moderate so that affordability conditions do not get out of hand,” says Lawrence Yun, chief economist at the National Association of Realtors.
Trend 3: Americans are flocking to the ‘burbs
The COVID pandemic has sparked debate about the fate of cities. For now, Americans’ move from urban centers to suburbs and smaller cities is “unambiguous,” says Robert Dietz, chief economist at the National Association of Home Builders.
“It’s an acceleration of trends that were already in place,” Dietz says.
Dietz says long-neglected Midwest markets could see new demand. He named Kansas City, Columbus and Indianapolis as destinations for buyers seeking bargains.
“People are moving from high-cost markets like California,” Nothaft says.
With Americans spending more time at home, many buyers are looking for bigger homes with home offices, home gyms and spacious yards.
“Even people who were very content with their home before the pandemic, now some of them are saying, ‘My home is too small,’” Yun says.
Trend 4: Some homeowners will struggle, but the pain will be muted
A decade of job gains disappeared in the first month of the coronavirus recession, Yun notes. That dizzying drop, the U.S. labor market has recovered many of the job losses.
“Hypothetically, even if there was to be some price decline of say 5 percent, the housing market can easily absorb that,” Yun says. “It will not cause foreclosure problems.”
Yun says struggling homeowners will be able to sell their way out of trouble.
Rick Sharga, executive vice president at RealtyTrac, likewise predicts that foreclosures will rise in 2021, but the fallout will be manageable. While some homeowners will go into default, most will sell before foreclosure.
“Homeowners are sitting on a record level of equity right now,” Sharga says.
A chronic shortage of homes for sale and under construction is propping up prices.
“We will see the foreclosure numbers increase. But it is important to remember where we’re starting from,” Fratantoni says. “We’re at a 40-year low in foreclosure rates right now. They’re going to go somewhat higher. But because of the equity positions many homeowners have, you’re just not going to see them get to foreclosure.”
Trend 5: The VA loan market is on fire
The volume of mortgages backed by the U.S. Department of Veterans Affairs has exploded, says Chris Birk, director of education at Veterans United Home Loans.
“This was a truly historic year,” Birk says. “This was the biggest year in the history of VA lending.”
VA loan volume nearly doubled from 2019 to 2020. It was the first time the VA has issued more than 1 million loans in a year.
Younger veterans are driving demand, Birk says. VA loans require no down payment and have loose requirements around credit scores, allowing veterans to accelerate their home-buying schedules.
“They don’t need to spend years saving a down payment. They don’t need to build pristine credit,” Birk says. “They’re able to jump into the housing market well ahead of their civilian counterparts.”
VA loans once were an afterthought, making up just 2 percent of overall loan volume. VA loans now are about 10 percent of the mortgage market, he says. Birk says VA loans have mostly shed the perception that they were “inferior” to other types of mortgages.