2021 market expectations for buyers and sellers

Key insights

• In the midst of the COVID-19 pandemic, the housing market has remained an economic bright spot.
• The full recovery of the economy will be dependent on relief for lower-income workers, and on a vaccine or other developments that allow for shuttered sectors of the economy to reopen.
• There is no large surge of inventory expected, so sellers can expect continued moderate price appreciation in 2021.
• Sustained low interest rates will provide a small boost to buyers, who will face low inventory and higher home prices.

Sharry Schmid, president, Edina Realty

As president of Edina Realty, Sharry Schmid provides guidance and direction to nearly 2,500 REALTORS®.

2020 was, of course, a year that no one could have predicted. But while COVID-19 has impacted most industry sectors, the housing market has remained an economic bright spot. Outside of the spring months, when stay-at-home orders led to a significant drop in listings and sales, the market rebounded and remained steady throughout the summer and fall.

As we move into 2021, many are wondering if the real estate market can continue to flourish, and what else we can expect from our local economy. Though this year was a stark reminder that no one has a magic crystal ball to predict the future, we are able to make a few reasonable projections as to what the next year will hold for housing in Minnesota and western Wisconsin.

Are we in a bubble?

The housing market’s sustained momentum during COVID-19 is in sharp contrast to the economic downturn we experienced a decade ago — leading many to wonder if we are in the midst of a bubble that has yet to burst.

In fact, the reverse may be true. It’s important to remember that today’s lending practices are sound, which wasn’t always the case prior to the previous recession. Homebuyers are evaluated more stringently in their loan application and approved only when their credit, banking history and employment records indicate that they are on strong financial footing. In other words, borrowers today are evaluated not only on if they can afford to pay their mortgage, but if they can do so responsibly and still have money to save or spend on other expenses.

As a result, even despite the instability in our economy at present, we are not experiencing an overwhelming number of forbearances. Forbearance occurs when a borrower is unable to pay their monthly mortgage payment, and they request that their lender allow for temporarily delayed or lowered payments. While a larger-than-usual percentage of homeowners are behind on their mortgage payments at present, the numbers are not yet alarming to housing-focused economists.

If you need to select an image to represent today’s housing market, then, don’t think of a bubble about to burst. Instead, picture a walking stick that is helping the economy limp along, even as other industries and sectors struggle or remain closed altogether.

We’ll be watching the K-shaped recovery

Next, let’s discuss the sectors that are still struggling in the wake of COVID-19. It’s true that some segments of the economy, like housing, remain strong. For hospitality, travel, tourism, restaurants, live entertainment and other service sectors, earnings remain low and unable to rise until the pandemic is under better control.

The result, when you graph the recovery of these varying sectors, is the shape of a “K”. Some industries (and the employees they represent) are on the rise in terms of earning and stability; other sectors are continuing to fall as the months go by.

This inequity is a stark cause for concern; the economy cannot truly recover if a large segment of the population is unable to regain their earning power. It is widely acknowledged that federal and state support for these groups is necessary. We will be watching to see what level of support is offered in the coming months, keeping in mind that a new incoming administration in Washington may have an impact as well.

The future of work (and working from home)

As people spend more time in their homes than ever before, many are reassessing their needs and wants. Whether it’s adding a home office, creating productivity zones for distance learning or moving to the lake home for a few months out of the year, homeowners are embracing change and the need to work virtually.

We expect that most professional workplaces will be more open to flexible work accommodations in the future, meaning that the need for at-home work spaces will continue even after COVID-19 is in the rearview mirror. As we define and refine the future of residential housing, everyone from homeowners to buyers to builders will be keeping these spaces in mind.

What else lies ahead in 2021

• Inventory: Unless a larger-than-expected number of homeowners default on their mortgage payments and enter foreclosure, we do not anticipate a surge in inventory in 2021. This means that housing inventory, especially in the lower price points, will remain scarce — giving sellers a continued advantage in the market. As they have in the last several years, buyers will compete over fast-selling listings.
• Home prices: We anticipate that prices will keep rising moderately in 2021, which means that median home prices in our 13-county metro will remain above $300,000 this coming year.
• Interest rates: While some economists believe rates could fall to an all-time low of 2.5%, most agree that a slowly improving economy will keep rates between 3-3.5%. In either scenario, the low rates will help to offset rising home prices for buyers.
• New construction: Perhaps surprisingly, builder confidence is at an all-time high. Due to home price appreciation, the gap between existing home prices and the cost of new construction is narrowing. Economists project that the usual 15-20% variance is down to just 5% in our market¹. Builders see a unique opportunity to capitalize on this trend, especially as many would-be buyers grow frustrated with a lack of available or affordable inventory meeting their criteria.

Our local economy

• Employment: At present, Minnesota’s unemployment rate is 4.6%, which is two points lower than the national average. The development of a COVID-19 vaccine or other impactful legislation will be critical to further lowering the employment rate in our market. Still, it is doubtful that we will reach the peak unemployment rate of the pandemic’s early days, which was 9.9% in May 2020².
• Income: Minnesota’s 2019 median household income was $74,593, which is higher than the U.S. median of $65,712. Wisconsin’s median household income was just shy of the median, at $64,168².
• Public transport progress: Construction continues for the projected 14.5 mile Southwest Light Rail Transit project, slated to begin service in 2023. As the communities along the route begin planning for this new mass transit service, we expect a rise in nearby commercial and residential development.

Looking ahead to a brighter 2021

In many ways, 2020 has been a test of strength. We have witnessed immense fortitude from our healthcare and essential workers, resilience from parents, kids and teachers, and ingenuity from businesses, organizations and families.

While this holiday season may not roll out the way you’d pictured it, I remain optimistic that the coming year will be much brighter than the one we are leaving behind. Today and always, I wish you and your family the very best of health, security and happiness.

_{Source: Zonda, Economist call November 2020.
US Census 1-year American Community Survey, 2019.}