Forbesby Natalie Campisi
Jan. 11, 2021
Buyers hoping to score a deal on a home in 2021—or even find something affordable without having to dip into savings or push their budgets past the “we-could-live-without-electricity” point—might need to check their ambitions. Both the experts and the numbers paint a picture of a seller’s market in 2021.
The good news is that new-home construction is expected to ramp up and more homeowners are likely to feel comfortable putting their houses on the market as people get vaccinated against the coronavirus. These two actions are necessary before the number of homes for sale is likely to increase, which could help temper price growth.
Forbes Advisor spoke with experts about whether housing will become more affordable this year and which areas of the country might experience a price correction.
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Home Price Growth Is Making it Harder for Entry-level Buyers
Even a global pandemic did nothing to slow down the rising cost of homes in 2020, which doesn’t bode well for prices as vaccines are rolled out to the public. Year-over-year home price appreciation shot up between May 2020 (6%) and November 2020 (10.3%), according to American Enterprise Institute (AEI) Housing Center data.
Homes in the medium- to high-price range, which the AEI Housing Center defines as costing no more than 125% of the conforming loan limit—$484,350 in 2020—saw the biggest leap in price appreciation, increasing from 6.6% year-over-year in May 2020 to 14.6% in November 2020.
In December 2020, the median listing prices for single-family homes shot up to $340,000, a 13.4% increase from the same time the previous year, according to Realtor.com.
All this to say that homes are quickly becoming less affordable for more buyers. Even record-low mortgage rates, which have dramatically reduced the cost of borrowing in recent months, and loan programs designed to help buyers on a budget—like FHA loans—are little help in today’s inventory-strained and competitive market.
“The supply shortage has led to home price increases that offset affordable housing programs,” says Sam Khater, Freddie Mac’s chief economist.
The National Association of Realtors’ Housing Affordability Index shows that housing affordability is declining—despite lower mortgage rates—because rising home prices have “more than offset the decline in rates,” Khater says.
On a national level, the number of homes for sale in December dropped 39.6% from the same time in 2019—about 449,000 fewer homes.
Areas Where Prices Might Drop—And Rise
Across the nation, home price appreciation grew in 2020, and the consensus is that we’ll see more growth this year—at least in much of the country.
The Northeast lead the pack with the highest year-over-year home price growth (5.5% from December 2019 to December 2020), according to the National Home Price Appreciation report from ClearCapital, a real estate valuation company. The West (3.3%), Midwest (3.2%) and South (2%) fell closely behind.
Some of the metro areas with the most eye-popping year-over-year price growth were Columbus, Rochester and Philadelphia.
Areas with the Most Price Appreciation December 2019-2020
Metro areaYear-over-year price growth
Rochester, New York
Not all areas saw price explosions. Some metro areas experienced home price depreciation, while others had minimal price gains. The places with dropping values also had higher levels of distressed properties within their market, which are lender-owned—usually due to foreclosure—and short sale homes.
Distressed sales are usually cheaper, which can pull down the property values of surrounding homes. More distressed sales typically results in slower overall price growth.
San Antonio, St. Louis, Dallas and Honolulu saw home prices fall year-over-year, while the San Francisco area saw home prices appreciate at a much slower pace than some of the double-digit growth cities.
Areas with the Least Price Appreciation December 2019-2020
Experts agree that both the South and the Midwest offer the best value for home shoppers and that few, if any, areas in those regions will hit major turbulence when it comes to price growth.
Ali Wolf, chief economist at Zonda Home, a housing market research firm, touts the price-per-square foot affordability of places like Tampa, Dallas and Raleigh.
Meanwhile, Danielle Hale, chief economist for Realtor.com expects the market as a whole to remain strong this year, with the biggest percentage price gains going to places like Seattle and Boise, Idaho. The slowest price growth is expected for the “New York metro area at just less than 1%,” Hale says.
Wolf also expects that some markets might underperform in 2021.
“We’re watching select locations and price points within San Francisco, Los Angeles and New York for a modest price correction,” Wolf says.
As more people have the flexibility to work from home, mid-size markets are attracting homebuyers, says Lawrence Yun, chief economist at the National Association of Realtors. And expensive tech hubs in California, like San Jose, where median home prices are around $1.25 million, will see an easing in demand.
“So, Sacramento, Riverside (California), Phoenix and Las Vegas will all benefit from Californians leaving expensive locales and moving into their area,” Yun says. “Moreover, the Midwestern cities that are super affordable but adding jobs will also benefit, namely Des Moines and Indianapolis.”
According to CoreLogic’s latest Home Price Insights forecast, Las Vegas, Houston and Boston are among the largest metro areas that could see a price decline through the fourth quarter of 2021. Nevertheless, forecasted declines “are less than 2% year-over-year,” says Selma Hepp, deputy chief economist at CoreLogic, a property analytics firm.
Places that were disproportionately hit by the pandemic and “experienced significant losses of employment in leisure and hospitality industries as well as oil, gas and mining, are likely to see lower price growth over the next year,” Hepp says.
3 Homebuyer Strategies in a Seller’s Market
Buying a home in a seller’s market can feel like you’re losing money. If you just wait a few months or even a year, prices will flatten (or come down)—at least that’s the hope. The problem is that prices could keep rising to the point where you’re priced out of the market. There’s no guarantee either way.
People who went through the housing crisis might be even more wary of buying in today’s market, fearing a bubble situation. Nobody wants to buy at the top of the market only to see prices come crashing down and taking your equity with it.
One of the clearest signs that home prices will keep rising (or at least not plummet) is that inventory is tight and construction is still lagging behind.
This stands in stark contrast to the mid-2000s when there was a surplus of housing stock. It was the era of the McMansion, when people were buying above their means and banks were only too happy to oblige. Today’s mortgage holders are vetted carefully and held to strict standards. This makes for a housing market with a solid foundation.
1. Plan to Stay in the Home for at Least Five Years
The five-year rule in real estate is an important one. It’s a rule of thumb that dictates generally how long you’ll need to hold onto a home in order to make up the money you spent on closing costs. Because closing costs can exceed 5% of purchase price, five years is typically how long it will take to break even.
Of course, if your home value increases more than 5% (or whatever your closing costs were) in a shorter time frame, then the five-year rule no longer applies. But you don’t want to buy a house with the intention of moving in a few years because then you risk losing thousands of dollars if you don’t earn enough equity to recoup your costs. And if you plan to buy another house, then you’re going to sink even more money into closing costs.
For those that plan to keep the house for the long haul, buying now could be a smart move.
“We have clients who thought the market was going to top out a couple of years ago so they waited. They now are priced out of the market,” says Gordy Marks, managing broker at RE/MAX Northwest in Bothell, Washington. “Homes will perpetually continue to appreciate over time. Even if prices flatten or decline in a slowdown (homeowners) will still win in the end by holding onto the home.”
2. Look for Income-generating Opportunities
Homebuyers on a budget might want to consider properties that can generate income, either through long-term rentals or Airbnb.
“If it works with their lifestyle, homebuyers on a tight budget can look to mixed-use residential and income properties, like a single-family home with a separate casita that could be used as an Airbnb,” says Erin Sykes, real estate broker at Nest Seekers International in New York.
Some mortgage lenders will even consider future income generated by the property you want to buy when they’re reviewing your loan application. Fannie Mae, for example, allows lenders to use future rental income in their lending guidelines as long as the property falls under one of these categories:
- A two- to four-unit principal residence property in which the borrower occupies one of the units
- A one- to four-unit investment property
This might include a duplex, a single-family home that is split into several units or a house with a mother-in-law suite.
3. Consider Factors That Influence Long-term Property Value
Homebuyers who want to see their equity grow over time, should pay attention to both the history of the property and what might happen in the area tomorrow, says real estate investor Matt Andrews, founder at REI Collective, in Tampa, Florida.
“The key is to look at the long-term viability of the area and stay within your budget,” Andrews says. “The best way buyers can evaluate the true long-term value of a property is to look at the historical price of that property or similar properties going back several years—ideally, 15 or more.”
Next, you’ll want to look for signs of growth and improvement. Are major employers moving into the area? Are streets being widened? Are retailers moving in? Signs of growth are good indicators that your property value will continue to rise over time.
There are many seemingly unrelated things that can dramatically affect—either positively or negatively—the opportunities in a particular real estate market, Andrews says. Even things like new pro-business tax laws can signal future growth.
Above all else, you should stick to your budget so that you’re not house poor, the experts echo. It won’t matter much if your home appreciates in value if you can’t afford the mortgage payment. It’s better to leave enough room in your budget to account for unexpected emergencies and buy something smaller or in a more affordable area than to get your dream house that pushes your budget to the max and you risk losing it.
Licensed Associate Real Estate Broker (FL, NY & NJ), Nest Seekers Chief Economist, LEED AP