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Housing Market 2021: Two Questions with Expert Answers

There is no doubt that 2020 was a challenging year for the economy, but the housing market was a notable exception. As more Americans transitioned to remote work and schools embarked on virtual learning, the demand for single-family homes skyrocketed. At the same time, with record job losses throughout the country, many homeowners took advantage of mortgage forbearance options while some renters fell behind on their monthly bills. Looking forward to 2021, Wells Fargo Securities’ Economics Group answers two top questions related to the housing market.

What is the forecast for the 2021 housing market?

Perhaps the biggest wildcard going into 2021 is the rollout of COVID-19 vaccines. With more Americans receiving the vaccine, more businesses will look for employees to return to a central office and schools will begin reopening their doors for full-time, on-campus students. Will this lead to a downturn in the housing market? Not likely, according to the Wells Fargo economists. In fact, they expect new home sales to rise 16% in 2021, putting up the strongest numbers since 2006, while existing home sales are expected to rise 4%. The Wells Fargo folks also believe the inventory situation will make a moderate improvement, as those who put off relocating, trading up, or downsizing during the pandemic will start to look for new homes. Inventory will also increase along with an expected rise of 7.1% in single-family home construction. While this is great news for buyers, the other part of the equation, affordability, will remain a challenge. Economists expect buyers to continue looking to suburbs and exurbs for more affordable housing, as well as second-tier metro areas with more affordable housing options, strong home sales, and new construction numbers.

What is the danger the housing market will turn into a bubble?

In 2020, the median price of a single-family home increased 15.1% over the 2019 average, leading some to wonder if a housing bubble is on its way. Rather than fear a bubble, the economists at Wells Fargo instead say it is important to understand the impact of the pandemic on the housing market. The spike in the median home price is not due to increased speculation, as in years past, but rather an increased demand for housing. As Americans settled in for remote work, remote school, and a home-based lifestyle, the demand for more living space skyrocketed. Apartment renters looked to buy, while homeowners searched for more square footage. Those who considered downsizing chose to hold on to their larger homes for more workspace or to accommodate adult children moving back home. Moreover, existing homeowners looked to home improvement projects to enhance their properties. Finally, with expanded mortgage forbearance options in the CARES Act and greater discipline on the part of lenders, fewer American families faced foreclosure in 2020 than in 2019. The end result was a dramatic increase in median home prices coupled with a nationwide lack of inventory.

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