As we prepare to enter 2021, our country has lost more than 250,000 people and over 22 million jobs during the 2020 pandemic. Millions of others have suffered from COVID-19 complications, both health and economic related. At the same time, the housing market has shown surprising resilience, with price growth and home sales rising to new heights.
How is this possible? Quick policy action from all levels of government protected vulnerable households from slipping into foreclosure and eviction. However, many of these protections are set to expire in the new year. Without renewal, our housing market forecasts show 2021 could highlight the underlying economic damage from the pandemic.
Last April, we released the first of our series of monthly housing market forecasts. Our forecasts generally followed a “Flying W” shape, with an initial sharp drop this spring, a noticeable rebound in the summer followed by another dip in the fall, and finally, a stable road to recovery sometime in 2021. These forecasts have been based on assumptions that – because of a split congress – protective economic policies would be hard to come by. Thankfully, this assumption proved to be wrong during the first wave of the pandemic, with congress providing generous protections for U.S. households and the federal reserve and treasury providing support for financial markets. As a result, the U.S. housing market was spared catastrophe.
Unfortunately, a third wave is upon us at a time of peak political division in the country. The protections for U.S. households and support for financial markets are set to expire at the end of the year, congress is split, and the outgoing administration is sending signals they are going to let next year’s congress and administration sort out a new relief package. Our forecasts below reflect the political uncertainties concerning a renewed relief legislation.
2021 housing market
Across our five indicators, our housing market forecasts of single-family home sales and purchase mortgages show the largest potential hit in 2021 stemming from the possibility of higher rates and lower supply of mortgage credit. Without renewed protections for homeowners and support for our financial institutions, home sales could start the year off by falling 12% to 20% on a year-over-year basis.
Though our forecasts show a spring rebound, this is due to the fact that home sales plummeted in spring 2020, setting a low bar for year-over-year growth. Similarly, our forecasts for purchase originations show negative growth throughout next year, although this is at least partially due to the unexpected boom in home buying this year.
On the other hand, our models suggest growth in refinance mortgage origination volume will be positive through 2020Q2 as existing homeowners continue to take advantage of low mortgage rates. In addition, some of the positive growth may be due to distressed homeowners seeking to refinance a mortgage for more favorable terms. However, our models are also showing that mortgage rates are likely to rise significantly by the end of the second quarter in 2021 and dampen demand for rate and term refinancing.
Single-family housing permits
New construction has perhaps been the brightest spot in the U.S. housing market during the pandemic, with historically low inventory providing opportunity for homebuilders to fill the supply gap.
Our housing market forecasts suggest homebuilding will continue to be a bright spot, with both medium and long-term economic fundamentals supporting demand for new housing over the next two decades. That said, there is some short-term risk associated with distressed existing inventory coming to market when foreclosure protections end in the new year, and our short forecasts show a small window of negative growth as builders temporarily reduce their applications for new permits during this period.
Home prices
Finally, our housing market forecasts show the possibility of modest price declines of 2-5% through most of next year. These price declines reflect a likelihood of rising inventory, composed of both involuntary (foreclosures) and voluntary (distressed households selling to avoid foreclosure). Rising inventory, coupled with rising mortgage rates, present the worst-case scenario of dampened demand in the spring.
In addition, prices boomed this year due to very thin inventory, so the bar for rising prices will be exceptionally high in 2021.
Housing market beyond 2021
Despite these short-run uncertainties, the medium to long run housing market forecasts look strong and give industry players legitimate reasons to be bullish. This is for two reasons:
First, the demographic structure of the United States should continue to support prime-household growth over the next two decades. The Harvard Joint Center for Housing Studies estimates Millennial households are expected to grow by 32 million over the next twenty years. That’s a lot of new homes that will be needed, regardless of whether they buy or rent.
Second, it’s tough to imagine the persistent inventory woes will remedy themselves anytime soon. Current housing starts are at about 74% of the 50-year average relative to the number of U.S. households. The two combined set a scenario where we’re likely to see demand rise faster than supply, which bodes well for those that make a living off of rising home prices and sales volumes.
Methodological notes: While Haus’s national and regional economic forecast models remain proprietary, we can provide some high-level detail on what they include. First, we develop three macroeconomic scenarios of how gross domestic product, household income, and household and prime-age population growth might respond to the impacts of COVID-19. We then use these scenarios at the national and metropolitan level to predict how our housing market metrics might respond given past movements to recessionary periods but modified to reflect the atypical “quick and deep” plunge of a pandemic compared to the typical slower onset of previous recessions. We employ a random forest regression technique to predict monthly changes in our housing market indicators over the upcoming 60 months. Our median absolute error rates range from 6% for home prices to 10% with a median non-absolute error of -0.04% to 0.08%.
I see that you are forecasting depreciation at the start of 2021. So, for example, in your Light scenario prices in January 2021 will be 2.4% lower than prices in January 2020.
Using the Case-Shiller Index as the “truth” on this, I would be shocked if the January 2021 Case Shiller (which will be published in March 2021) shows depreciation.
I’d be willing to bet you a steak dinner (shipped frozen, to my/your house) that the January 2021 Case Shiller is positive.
Do you accept?