Amid the backdrop of rising home prices and fierce competition for available homes, some are asking what the current conditions mean for the future of the housing market.
Lawrence Yun, chief economist of the National Association of Realtors, addressed the current state of the housing market and expectations for the future during a presentation Thursday at a virtual conference for Realtors across the country.
For the year as a whole, he expects an increase in both new and existing home sales as well as higher prices and mortgage rates. His 2021 forecast includes mortgage rates at 3.2%, new home sales increasing 20%, existing home sales up 10% and home prices rising 7%.
Housing Inventory Situation
Yun said there’s a slight loss in home sales momentum because there’s record-low inventory and not enough houses for sale.
“We are beginning to sense some topping out,” he said. “What this means is that sales activity is still above one year ago but no longer 20 or 25% above.”
He said the reason for the decline is because of the sizeable drop in housing inventory, particularly for starter homes.
“The reason for the decline is not because the buyers stepped away,” Yun said. “Inventory has declined by 40% in that $100,000 to $250,000 price range, and that’s simply why sales are not clicking.”
In fact, the inventory of homes in the above $1 million category has actually increased slightly while sales in this price range have gone up about 80%.
“But on the starter home, it’s very difficult,” Yun said.
There are also many properties listed, but they are sold so quickly they are not counted as active inventory. In fact, the median days on market is at a record low.
“Home sales could be 20% higher than what it is today if we had more inventory,” he said.
Yun said the reason for the shortage is not something that happened in a single year. It’s because builders didn’t create enough housing after the Great Recession.
“The cumulative effect of 14 years of underproduction is we simply don’t have enough homes for sale,” he said. “We need to bring more housing inventory. We will not fix this housing shortage in a simple one-year timeframe.”
Yun suggested various policy changes to help increase inventory including a reduction in the capital gains tax so more investors would sell, the promotion of tax credits and opportunity zones, and infrastructure spending related to housing.
Predictions for the Remainder of 2021
As the year continues, Yun is anticipating there will be more housing inventory for three reasons: 1) home construction is ramping up although it may take several months to show up as inventory; 2) people who were hesitant about allowing buyers into their homes during the pandemic are now vaccinated; and 3) owners receiving mortgage forbearance are likely to use their equity to sell their homes.
In fact, Yun mentioned Provo-Orem as having one of the highest percentage gains in single-family home construction.
“More supply is good news, good news, good news,” Yun said.
Along with more supply, Yun is expecting a decline in demand because higher prices and mortgage rates may push some would-be homebuyers out of the market.
“I think it will be less multiple offers, less hurried decision, less frenzy,” he said.
As the U.S. faces a number of inflationary pressures, yields on 10-year Treasuries are rising, which will ultimately push up mortgage rates.
“The trend overall is mortgage rates will be trending higher,” he said especially for those who wait longer.
Yun said he expects rates to average 3.2% for the year as a whole, but they could rise to 3.5% by the end of the year. The higher rates combined with rising prices could push some buyers out of the market due to affordability concerns.
“So a combination of more supply and less demand means less frenzied activity as we proceed with the year,” Yun said.
To learn more about what’s happening in the housing market in your local area, contact a local Realtor. Find a directory of Utah Realtors at UtahRealtors.com.