Predicting the future after an unpredictable past
Let me acknowledge two obvious truths right off the bat: first, at this point there is nothing that can be said about 2020 that has not already been said, and said often. Second, no one knew 2020 was coming, and so clearly no one can tell what 2021 will bring. If the past year has taught us anything at all, it is that prognostication is mostly pointless.
Having said that, here are my predictions for the coming year! All kidding aside, while there is much we do not—and cannot— know, there are a few “reasonable expectations” for this year, at least in the world of real estate. Let’s take a look at how we fared in 2020, and what we can anticipate (within reason) for the year ahead.
Coming into 2020, real estate was at least two years into a gradual slide towards a seller’s market. Decreasing inventory, a dearth of new construction and favorably low interest rates all combined to put ever-increasing pressure on home buyers. What began in certain “pockets” (specific areas and price ranges) gradually expanded outward until nearly all corners of the market were affected. This was true as 2020 began.
Then we all know what happened in mid-March. The onset of COVID-19 did shrink both the buyer and seller “pools,” but it shrunk the seller pool by much more. An unscientific example would be: if, on March 1, there were 100 buyers for every 75 sellers, by May 1 there were 75 buyers for every 25 sellers. The pressure on buyers increased precipitously.
At the same time, interest rates continued to improve. According to Freddie Mac, the average interest rate on a 30-year, fixed-rate mortgage for the week ending January 2, 2020 was 3.72%. The average rate for the week ending November 5, 2020 was 2.78%. Almost a full point lower in just 10 months. It goes without saying, a 30-year, fixed-rate mortgage under 3% is unprecedented. (Just for fun, the week ending November 6, 1981, the average interest rate was 18.37%!)
As 2020 wore on, more and more buyers gathered on the sidelines. As new homes trickled onto the market, those buyers “rushed the field” with pre-approval letters in hand, ready for battle. After multiple offers and escalation clauses, once the dust settled, one buyer rose victorious, while the rest returned to checking Zillow every six minutes for the next new listing. In one instance, a home I listed generated 20 showings in just over 24 hours, resulting in eight offers! And there would have been more, but eventually buyers gave up, realizing they stood little chance in the face of such competition.
The bottom line: for all the ways 2020 was a 5-alarm dumpster fire we’d all like to forget, it was also a seller’s market, and a really strong one at that. And for the buyers that did get a home, they financed it cheaper than any buyer before them.
As we stand on the edge of the unknown (in more ways than ever before, in recent memory), what might 2021 look like? Offhand, I don’t think we’re going to make much improvement on the inventory problem. At the time of this writing, there were a total of 531 homes on the market (our market covers everything within 30 minutes of Lynchburg—roughly what we call Region 2000). That is not many homes. In late February 2020 there were 921 homes available, and in the first week of November 2019 there were 1029. For context, in a balanced market we would end the year with a low of roughly 900 +/- homes. And from there, as spring approached we would see a gradual increase until the first week of July, when it would cap out around 1500+.
There is nothing that would lead me to believe this will change for 2021. The only difference this year is that we are more familiar, and in some sense, more comfortable, with the existence of the virus. And to the extent that we are, potentially more sellers will take advantage of the market. I would expect a spring/summer increase in new listings, as usual, but a much flatter curve (there’s a timely reference) than we would see in a more balanced year.
Similarly, if long-term restrictions begin to impact income and job security, that could be reflected on the buyer side of the equation. While our local economy is stable, the impact on areas from which new buyers might move could decrease the overall buyer pool, relieving some of the pressure on local buyers looking to move within the market.
Finally, I believe builders are eager to provide more homes in more price points, but the cost of materials has skyrocketed and finding certain components has become very difficult. If the cost of goods peaks (or maybe by this printing, already has), and the supply chain issues are resolved, we could see a modest uptick in new homes being built.
All that to say, while we face many challenges on numerous fronts, real estate is contributing solidly to our economy, and that is unlikely to change in 2021.
Dan Vollmer is an Associate Broker at Re/Max 1st Olympic and member of the Virginia Association of REALTORS Board of Directors. Find him at www.danvollmer.com.