Many industries are on shaky ground right now but real estate finance is not one of them. Looking ahead, there are a few promising indicators that can be used to confidently predict another strong and record-setting year for purchase mortgage origination business.
Take a step back to this time last year. Nothing was guaranteed at the onset of the COVID-19 pandemic. After an adjustment period and weeks of instability, the market surged and has showed no signs of slowing down. Now the question on everyone’s mind is, how will the market behave in 2021?
This is a complex question, but mortgage originators have some clues as to how it may play out. During the first three months of this year, the country will gain a clearer understanding about the direction of the pandemic as states implement vaccination plans while taking further measures to address health and economic impacts.
The mortgage industry also is likely to see the continuation of historically low interest rates and high homebuyer demand. With that backdrop, here are some predictions for the 2021 real estate market.
The level of activity from interested homebuyers remains high. Combine this sentiment with scarce inventory and access to low-interest mortgages, and it’s difficult to fathom a scenario in which home prices do not continue to rise.
In the vast majority of cities, the number of buyers scouring the market exceeds the number of available homes. Although this is particularly true right now, it’s a pattern that has been around for some time. And while ongoing demand may not produce the double-digit price growth of 2020, expect median sales prices to keep rising. When all is said and done, 2021 may turn out to look like a normal year in this respect when compared to the prior year.
The ripple effects of the pandemic on the economy will likely persist well into 2021 and beyond. This may mean more delinquencies and other financial obstacles for homeowners. More dominoes are likely to fall in the form of foreclosures and distressed-property sales, which can place pressure on markets and slow the pace of home-price increases.
Take, for instance, the Federal Housing Finance Agency’s home-price index, which rose by nearly 8% year over year in third-quarter 2020. In turn, this substantially increased the aggregate equity for U.S. homeowners, according to a CoreLogic report. This sort of growth is unlikely to occur in 2021. Some projections place growth at less than 2% annually.
Housing markets are sensitive to rock-bottom interest rates and other low costs associated with mortgages, but there could be some problems on the horizons. Although consumers benefit from favorable rates, not everyone can afford the costs of a home.
A so-called “K-shaped” recovery appears to be occurring as industries such as technology and financial services are recovering more quickly than the travel, hospitality and food-service sectors. This tends to benefit wealthier Americans over low- and middle-income earners. Given these weaker labor markets, there’s a possibility that as job losses pile up, foreclosures will follow.
In addition, forbearance provisions for federally backed mortgages have allowed homeowners to postpone payments if they are experiencing pandemic-related hardships. These provisions are set to expire later this year.
Based on many factors, housing demand continues to be the strongest seen in years. A main factor is the lack of housing built in the wake of the Great Recession. New-home sales actually fell in recent months, partially due to a shortage of affordable listings. The biggest risk for the housing market is a lack of affordability. This will most likely lead home prices to level off in many markets. In short, demand is probably stronger than it has ever been, but there may not be enough inventory to support demand this year.
Multifamily housing also is in demand, which makes sense given the circumstances. People are adjusting and looking to live closer to family, friends and new opportunities. This can benefit originators who work with investors on smaller apartment deals. In 2020, apartment construction was down year over year and completions were expected to hit a five-year low, according a RentCafe report.
These numbers fall short by today’s standards and are unlikely to sufficiently address the demand for multifamily housing over the next decade if the pace remains unchanged. Shutdowns, along with limited access to labor and building materials, caused this section of the real estate market to underperform in 2020 despite the need for more affordable housing. With some luck, these barriers should subside in 2021 and provide a much-needed boost for apartment construction.
Affordability is a huge factor for many households, especially in times marred by a pandemic. And with new expectations that allow many people to modify their commutes and work remotely, staying near urban core areas may no longer be a high priority.
As a result, more people may opt for larger or less-expensive homes in suburbs. Even prior to the arrival of the pandemic, the mortgage and real estate industries were experiencing a growing trend of buyers turning away from expensive big-city properties in favor of the suburban life. This sentiment may only be amplified in 2021 as consumers settle into new and more-affordable lifestyles.
Mortgage originators should have spent a good portion of 2020 staying in front of leads through strategic digital-marketing initiatives. In this way, as things open back up, clients who are ready to purchase remember them. Originators should maintain a purchase-centric mindset.
As a semblance of normalcy returns — hopefully in the first half of 2021 — purchase and refinance volumes will remain healthy. The housing market is likely to see trillions of dollars of activity in 2021. Again, record-low mortgage rates are a key reason why so many people are confident about the prospect of owning a home. And as overall market conditions remain healthy, more people may be able to get in on the action. ●