First-quarter 2021 housing trends: Low mortgage rates and buyer competition prevail

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There are few reasons to lament the end of 2020, but the housing market has been one bright spot in an otherwise bleak year.

Anxiety across the broader economy pushed mortgage rates to record lows, which spurred a hot real estate market and led to increasing property prices in most areas.

The early part of 2021 will largely see a continuation of these trends. Here’s what to look out for in real estate in the first quarter of the new year.

Low mortgage rates will keep stimulating demand

“I’d say record low mortgage rates is number one on top of the list,” said Frank Nothaft, executive and chief economist at CoreLogic. “That’s very favorable, that helps support affordability. With mortgage rates already a percentage point less than they were a year ago, that means monthly principal and interest payments are lower than they were a year ago.”

Those rates, coupled with changing housing needs as a result of the coronavirus pandemic have led to an unusually busy real estate market. The normal winter slowdown has been far less pronounced this year than in the past, and it’s likely that the coming quarter will see a relatively high number of transactions as well.

“It’s going to be better than before just because of all this residual demand,” said Lawrence Yun, chief economist at the National Association of Realtors. With the momentum of 2020 continuing, the first quarter of 2021 “should be pretty solid,” he added.

Demand is especially high in neighborhoods outside of downtown city cores, as increasing work from home and virtual learning requirements have driven many homeowners to favor space over on-the-doorstep amenities.

Housing supply will stay limited

Because demand has been so high at a time when builders and supply lines were constrained by the coronavirus pandemic and other natural disasters like wildfires out west, 2020 has been characterized by a tight housing market.

“The key question is whether we get more inventory steadily through 2021,” Yun said.

Nothaft is not optimistic on that front.

“We’re going to continue to see an acute shortage of inventory on the market for sale,” he said. “That’s been true for a number of months and that’s going to continue to be an issue for the new year.”

Over the summer, Yun told Bankrate that nationwide, there was only a four-month supply of available houses, compared with a six-month supply, which is considered more normal.

The result will be a continuation of the competitive housing market we’ve seen over the last few months.

Strong demand and short supply will keep home prices up

The trends noted above: low mortgage rates, tight housing supply and intense competition among buyers will continue to drive home prices up in the first quarter of 2021.

“Prices may start to limit people from qualifying for mortgages,” Yun said.

“Low mortgage rates help affordability by lowering the monthly payment. Obviously, rising prices does not help affordability if you’re a prospective homebuyer,” Nothaft added. “You’ve got to save up more of a nest egg.”

According to the St. Louis Fed, the median home price in the third quarter of 2020 rose to $324,900, compared to $318,400 in the third quarter of 2019, and that growth trend is likely to continue in the coming quarter.

“I think we’re going to see good home price growth in the first quarter,” Nothaft said, but added that trend will slow later in the year. “Our forecast for the year as a whole is for home price growth to moderate.”

What should you do if you’re thinking about buying?

With experts predicting rising home prices and mortgage rates on the horizon, your window for the best possible real estate deal may be closing.

“You may be able to get a lower price on a home than if you waited till the spring, summer or fall,” Nothaft said.

Even so, he and Yun agreed, it’s better to make sure you’re in a strong financial position when putting in an offer on a house, rather than just jumping at something you think is a good deal.

“If you’ve been considering buying a home, what’s really important is having your own financial house in order, and that means taking steps to shore up your credit history and save the necessary funds to purchase,” Nothaft said, “If you have your house in order, absolutely, the first quarter is going to be a great time to buy.”

“Don’t follow the herd or make hurried decisions on such a major expenditure,” Yun added. “Don’t feel like one is missing out because one does not want to chase the upward momentum in the market, but if there’s a right home that meets their criteria, go ahead and make a bid and see how things play out.”

Bottom line

The first quarter of 2021 is probably going to look a lot like the majority of 2020 did when it comes to real estate. Interest rates will remain low and the home market will remain competitive, although those trends may become less intense and start to shift closer to the end of the quarter.

If you have all your ducks in a row, it could be a great time to buy your home — and it will almost certainly be a great time to sell as competition for houses stays intense. But, it’s not worth overextending yourself financially to buy a house. Even when mortgage rates begin to rise with home prices, likely later in 2021, the terms should stay competitive enough that good deals will be out there for a while to come.

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