Where’s the Real Estate Market Going in 2021?

As 2020 limps to an end, we face so many unknowns. How bad will Covid-19 get before it’s brought under control? How bad will the wave of evictions be when the moratorium on them expires later this month? How many home owners will be forced into foreclosure? What relief will we get from our lame duck Congress? If Republicans retain control of the U.S. Senate, how much will Joe Biden be able to accomplish? For that matter, will there be a peaceful transfer of power?

Despite these unknowns, I’ll offer here some insights of my own but also share what I’m reading in trade publications and news services.

Realtor.com has released a “2021 housing forecast” that predicts home prices, which have spiked during the pandemic, will continue to rise through 2021, to the detriment of first-time home buyers. The historically low mortgage rates will also tick up in 2021, further reducing affordability. The report predicts a rate of 3.4% by year end — still quite low, but an increase over current rates well below 3%.

To quote realtor.com, “folks shouldn’t hold their breath for a bargain.”

The report predicts that the double-digit appreciation seen nationwide in 2020 will decline to a still high 5.7% in 2021.

That said, there remain “hordes of buyers” who can still buy homes and who are bidding up the prices of the homes that do come on the market.

As I’ve reported previously, the inventory of active listings is not low because sellers are reluctant to sell.  Sellers know that now is the best time to sell. We are seeing record numbers of new listings, but they sell so quickly that the number of active listings remains low. And, of course, that dynamic is creating bidding wars which are driving up prices, beyond what comparable recent sales would justify.

That raises the question of how homes can appraise when they are bid up past their market value. The answer is two-fold.  First of all, the winning bidders are often the ones who waive appraisal, and, secondly, an appraiser has to consider the existence of competing offers in determining market value.  If a home sells for $30,000 over what it should appraise for based on recent sales of comparable properties, but the appraiser is told about losing bids that are as high or nearly as high, those other offers establish market value. Even if the appraisal then comes in below the contract price, the seller is typically able to stand firm, forcing the winning bidder to drop his appraisal objection or make room for buyer #2 to step in at the same price. This is bad news for buyers, but excellent news for sellers.

Getting back to the predictions for 2021, I believe that the Covid-19 effect I have described previously will continue well into 2021 and possibly beyond. That effect is a mass migration from crowded cities with high-rise condo and apartment buildings to single-family neighborhoods throughout Denver and the other metro counties.

That migration will continue to drive down prices in high-rise buildings while driving up prices in townhomes and detached single-family homes.

I should note, since I’m featuring a condo in Belmar Plaza this week, that the Covid-19 effect should not apply to that low-rise (5-story) building. A $690,000 condo there went under contract this week. On multiple visits to my own listing, I can’t recall sharing the elevator with another tenant more than once, and the stairs are an easy option since it’s only on the second floor.

As More Companies Encourage Work-at-Home, Expect More Office Space to Become Residential

While residential real estate is booming, the prognosis for commercial real estate must be pretty bad, especially since the Covid-19 pandemic has inspired many companies, big and small, to let their employees keep working at home permanently. And, of course, many companies, especially in the hospitality industry, have called it quits. Also, the oil and gas industry, a big part of Colorado’s economy, has suffered greatly from the reduced value of oil on the world market and we’re seeing big cut-backs in their operations. BP, for example, recently announced a 15% cut in personnel by year’s end.

This means that there will be a lot of vacant office space, and many commercial landlords, seeing a shrinking demand for commercial space and a rising demand for residential units, are thinking of converting their buildings to residential use.

This trend could “free up a lot of commercial space, which can be converted to affordable housing,” HUD Secretary Ben Carson told Fox News in a June interview.

An Aug. 12 article by Clare Trapasso on realtor.com is headlined “As the Pandemic Empties Office Buildings, Can Those Spaces Help Solve the Housing Crisis?” The article quotes realtor.com senior economist George Ratiu as saying, “Office-to-residential conversions would be a win-win solution in some cities where you’re seeing declining lease renewals and a massive shortage of housing.” The building shown here, which once housed the office of East Ohio Gas, is now an apartment building.

I have witnessed such conversions — in both directions — first-hand, long before Covid-19.  Back in 1991 I purchased a building that had been built in 1905 as a 28-unit apartment house. It had been converted to an office building before I bought it, but after I sold it in 2007, it was converted back to apartments.

During Denver’s 1980s oil bust there were many vacant office buildings in Denver and elsewhere, but they weren’t converted to residential use because the residential real estate market at that time was also depressed. Now, with the residential real estate market booming more than ever, I fully expect to see some of those high-rise office buildings converted to apartments or condos in coming years, some of them as mixed use (only partly residential).

Homeownership Surged During the Pandemic, According to a Realtor.com Report

On July 28th, Realtor.com published an article by Clare Trapasso (link) with surprising statistics about a surge in homeownership during the 2nd quarter of this year.

According to her article, which was based on a U.S. Census Bureau report (link), the homeownership rate surged to 67.9%, the highest it has been since the Great Recession of 2008. (See chart below.) That rate was 3.8 percentage points higher than the same quarter of 2019 and  2.6 percentage points over the first quarter of this year. Covid-19 arose during the last month of the first quarter, but it dominated the entire second quarter.

Gray areas = Recessions / Blue line = Homeownership rate / Red line = Seasonally Adjusted Rate

The homeownership rate in this century peaked at 69.2% during the second and fourth quarters of 2004.

As you’d expect, the homeownership rate varies among different age groups, currently 40.6% for adults under 35 and 80.4% of persons 65 and older. The rate has been rising in each age group. In 2015 (2nd quarter) it was 38.4% for the under-35 age group, and it was 78.5% for the 65-and-over group. The greatest increase was in the 35-44 age group, which increased from 58.0% to 64.3% during the same 5-year period.

Homeownership surged in every race and ethnic group in the second quarter from last year to this year. For Non-Hispanic Whites, the rate increased from 73.1% to 76.0%. For Blacks it surged from 40.6% to 47.0%, and for Hispanics of any race, it surged from 46.6% to 51.4%.

The Census report came with a caveat that its data collection methodology was impacted by the   Covid-19 pandemic, shifting from a mix of in-person and phone interviews to entirely phone interviews, which resulted in a reduced response rate, declining from 70% in April to only 65% in June, compared to an average response rate of 82.7% during the second quarter of 2019.

Realtor.com’s chief economist, Danielle Hale, believes the increase in homeownership was distorted by the change in methodology. “It’s likely the homeownership rate rose, but I don’t think it’s likely that it rose that much,” she said.

According to the article on realtor.com, “After a pause during stay-at-home orders, the housing market has rebounded — and then some. The lack of homes on the market hasn’t discouraged the hordes of buyers from descending en masse, seeking to escape small, city apartments and cramped starter homes while taking advantage of record-low mortgage interest rates. (Rates dipped just below 3% for the first time ever earlier this month.)”

As an example, Rita and I just locked in an interest rate of 2.5% for refinancing our home’s mortgage with Jaxzann Riggs of The Mortgage Network. A buyer I’m working with was quoted a 2.25% rate.

“People still want to own homes, and with mortgage rates low, a lot of people are taking advantage of that even though there are lots of scary things going on in the economy,” says realtor.com’s Hale.

The article continues, “This has led median home prices to shoot up 9.1% year over year in the week ending July 18. That’s despite a recession and the most widespread unemployment since the Great Depression. Meanwhile, the number of homes for sale is down 33% compared with the previous year, when the nation was already experiencing a housing shortage.”

Why Real Estate Won’t Crash Like It Did Before

Many buyers and sellers of real estate are wondering whether we’ll see the kind of crash in real estate values that we saw in the Great Recession of 2008 onward. Experts agree that we will not.

In an April 22nd post, realtor.com explained that circumstances this time are quite different from then. Reasons cited by realtor.com’s economist, Danielle Hale, include the following:

First, the 2008 crash was created by a rash of bad mortgages — a situation that was remedied because of that crash. Second, there was an oversupply of houses for sale, whereas today there is an undersupply.

According to the realtor.com post, “There are simply too many would-be buyers out there: millennials eager to put down roots and start families, folks who lost their homes during the last recession and want to buy another property, and boomers looking to downsize.”

Lawrence Yun, chief economist at the National Association of Realtors, predicts that home sales will pick up again quickly and that prices will not fall.  He sees the luxury market taking the biggest hit, largely because the buyers of those homes may have lots of financial liquidity, but it is in stocks which they don’t want to sell while prices are low.

Also, widespread mortgage forbearance will prevent the surge in foreclosures we saw before.