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The Real Estate market is always in a constant state of movement. This article lays out the trends for the rest of 2021.
The housing market has been steadily gaining momentum in the last few years. The COVID-19 pandemic may have briefly dampened the otherwise hot demand for properties, but it's now back on track. Since last year, property values have soared, buyer demand outpaces available supply, and mortgage rates remain at historic lows. These factors make real estate one of the few thriving industries during an otherwise difficult time.
However, just like everything else, real estate is in a constant state of movement. We may be seeing a massive demand for houses now, but it's great to know if the trend will be sustained or if it's up for a correction any time soon. Furthermore, there are a lot of factors affecting property prices and demand. Therefore, it's better to know what the future trends will likely be to plan your finances accordingly.
We've gathered a list of upcoming trends that might materialize later this year to provide a guide for the rest of 2021.
Real Estate Price Movement
Arguably, the first concern when purchasing or selling properties is the current market prices.
Property prices are affected by several factors, such as buyer demand and available supply. When there's high demand and low supply, you can expect property prices to rise. If it's the opposite, that is, there's a surplus of available properties for sale vis-a-vis the demand for such properties, then you can expect prices to fall.
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Mortgage rates also affect prices as they affect actual demand. People tend to be empowered to purchase properties if interest/mortgage rates remain low. Conversely, when rates rise, the market becomes more defensive, and thus demand slows down too.
TREND: Home prices have been rising for some time. Despite the uncertainty that the pandemic has brought, people are starting to see some signs of recovery and are now more confident to purchase properties, especially family homes.
Property prices are still rising (up 18% over the year, in fact). The rapidity of price increases in 2021 was unexpected. The springtime consensus among Fannie Mae, the NAR, and the MBA was that the median existing-home price would be around $331,500 at the end of the year. But median prices in June surpassed that year-end forecast by more than $30,000. Prices rapidly rose because demand exceeded supply. Demand will keep exceeding supply for a long time. So, home prices will keep increasing in the second half of 2021 and beyond.
While prices have increased rapidly, it's also common to encounter price drops. We must determine whether sellers do this to dispose of any property while it's still a seller's market. As much as 4.1% of listings had price drops in the week ending July 11, placing the market back toward 2019 levels. Sale-to-list price ratios also show signs of cooling down, sometimes indicating a slowdown in bidding wars and ever-rising property prices.
As of the end of 2020, the median home price was around $347,000, equivalent to an 11% jump compared to the same prices the year prior.
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Housing affordability
When we speak of affordability, it's not one-dimensional. In other words, the price of a property could be more affordable.
Incomes, the inflation rate, and interest rates also come into the picture. Even if prices of properties are rising, so is the average household income, then the said properties are still "affordable." If mortgage rates are low, property buyers can now afford more houses than they could have previously.
TREND: Ironically, we've seen how devastating the economy was last year when the pandemic hit us from nowhere. However, we could surmise that there was no income " loss ". Instead, it could be said that it just shifted the "wealth" somewhere else. Hence, that's precisely the scenario we see today. When factoring in rates, income trends, and inflation, consumer house-buying power was up 21% by the end of 2020.
Interest rates
Mortgage interest rates are another factor affecting the demand in the housing market and home prices and affordability. The rates fluctuate daily depending on various factors such as Federal Reserve policy, the bond market, investor interest in mortgage-backed securities, and, of course, inflation.
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TREND: The good news is that we see a continuation of the current trend. In the first half of the year, mortgage rates hovered around all-time lows. The average 30-year, fixed-rate mortgage rate was just 2.74% in January, up from 3.62% the year before and 4.76% a decade prior.
Mortgage rates dipped below 3% back in April and have primarily stayed there ever since. Last week, the average rate on a 30-year mortgage came in at a mere 2.8%, while 15-year loans saw an average of 2.1% -- a record low for these loans.
According to the significant forecasters, the 30-year fixed-rate mortgage will rise in the second half of 2021. Institutions such as Fannie Mae and Freddie Mac predict the rate will increase by about two-tenths of a percentage point. At the same time, the National Association of Realtors expects it to rise three-tenths of a percentage point. In addition, the Mortgage Bankers Association forecasts an increase of half a percentage point.
By averaging these forecasts, the consensus prediction is that the 30-year mortgage will average 3.38% in the last three months of 2021, up three-tenths of a percentage point from the second quarter's average rate of 3.08%.
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The fiscal stimulus, a more stable job market, and the looming revival of social and commercial spaces will all lead to increased economic activity, which will, in turn, lead to inflation and rising interest rates. This may be a boon for buyers.
In an applied setting, buyers need around $10,000 more to purchase a home should the interest rates increase from 2.75% to 3%.
As rates increase, people hesitate to buy. When people hesitate to buy, this starts a chain reaction that causes sellers to feel jittery, eventually leading to price discounts. Based on our study, prices could drop around 20% before the year ends.
Property inventory
Property inventory -- or the supply of properties currently available for purchase -- is another important factor in the real estate market. When inventory is low, and demand is high, it creates a seller's market. Here, you can expect prices to rise, bidding wars are rampant, and sellers usually gain an advantage during negotiations.
On the flip side, if supply is abundant over demand, buyers tend to have the upper hand. In a buyer's market, there are more available listings than there are buyers to purchase them. As a result, the market pace slows down, and overall price growth sometimes remains at consistent levels. You might even snag a property at a discount.
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TREND: As of this writing, supply has been shallow in recent years, and the coronavirus pandemic only worsened things. Sellers are hesitant to bring in strangers to their homes because of health concerns and add to that, the economic uncertainty of the buyers contributed to the decline in the number of listings. However, we're now slightly recovering thanks to rising investor confidence. New listings were up 9% in the week ending July 24, while overall, the market has seen a year-over-year increase during the past six months.
We have also seen indications that buyers are mellowing down. One reason why this is the case is the drop in closed sales. The number of pending sales (those still under negotiation) has dropped, at least compared to this year's peak. The speed at which houses are being sold has also slowed down. When we entered July, properties were selling 23 days faster. As we entered the last week of July, it went down to just 19 days, meaning buyers are spending more time applying more caution to these big-ticket purchases.
Another indication supporting our hypothesis is the reduction in mortgage applications. The Mortgage Bankers Association (MBA) stated that applications to buy a home were down 18% over the year last week and have declined for three months straight. Purchase applications are now at their lowest point since May 2020.
The type of properties buyers are looking for has also changed. Our lives have evolved during the past year and a half. Today's buyer is reshaping real estate accordingly and keeping the market strong.
The hybrid workspace, combining the comforts of your home with space for productivity and online conferences, is likely here to stay. People are no longer content with just about any property —they want homes spacious enough to have specific places for work and privacy.
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We also see some demand from many buyers for innovative home technology and green construction methods. People now are also more health-conscious! So, properties equipped with health-supportive systems such as UV lights and high-tech filtration for heating and air conditioning units may have a higher chance of getting sold than those not equipped with such systems.
While this all points out a slowdown in the short-term uptake, we think this is temporary—a temporary setback, or pause, to fuel another wave of property demand.
Bottom Line
No one knows how the real estate market will perform in the coming months, but the report above may happen if we look at empirical data, economic conditions, and current trends.
Summer 2021 should be an exciting phase as we see signs of economic recovery from vaccination and consumers beginning to feel more confident about social and leisure activities. So even though less than half of the US population is immunized so far, and there is that looming scare of mutated variant viruses growing in several states, there are still signs that things will turn out for the better.
As far as overall supply is concerned, more houses are needed because builders need to build more. In addition, home construction shows no signs of acceleration in 2021 due to the shortage of computer chips that control appliances. You may have noticed this If you recently stopped by to shop for a washing machine or refrigerator. Unfortunately, the selection is limited, and the shop will tell you that the earliest they can deliver might not be until weeks or months from now.
Your builder wants to sell a new home with a fridge. Shortages and increases in the prices of lumber and other materials are factors, too. Some builders who have supposedly started construction will delay its completion until after commodity prices have simmered down, contributing to construction slowdowns.
Ready to find your dream home in Denver?
Let us help you. Call or Text Kenna Real Estate Group at 303-955-4220 to get personalized assistance from our expert real estate agents.
Whether you're optimistic about the real estate market in the coming months or not, it's best to keep yourself updated on changes in market conditions. Keeping apprised gives you the flexibility on whether it's better to be more aggressive or keep a cash reserve and plan for a range of outcomes in late 2021 and beyond.
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