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The Housing Market: What to Expect in 2021

Written by Oren Jacobson | Feb 24, 2021

 

2020 was definitely one for the books. It came with many twists and turns, both for our nation and the rest of the world. We witnessed a pandemic significantly impact employment, supply, demand, and our overall economy, to say nothing of the physical and mental well-being of our families and communities. Although the pandemic caused a short and steep pause in the market, within a few short months, it became clear that new construction housing was going to thrive in spite of all the other external problems.

As we think about 2021 at a national level, conditions for another strong year for housing exist. Today, it’s hard to see many short-term reasons why builders shouldn’t be successful. Supply remains low, mortgage rates remain low, and overall demand remains strong.

The Federal Reserve will continue to do what is necessary to ensure the liquidity markets stay stable, meaning mortgage rates should remain in a generally lower place. Congress, under our new Administration, is on the verge of passing another massive economic support bill to help bridge what is hopefully the final phase of hardship caused by the pandemic. Beyond that, there should be bipartisan support for a big infrastructure bill, something the previous Administration also wanted to pursue before external events took over. That, plus expanded access to the vaccine should hopefully help reenergize an economy that has stalled in recent months despite being resilient.

What might get in our way? I’m concerned about several factors. However, it should be stated that there is no certainty that these factors will emerge, let alone when. First, the combination of supply scarcity and the increase in housing costs due to labor and supply shortages could end up pushing pricing too high for some buyers. If rates move up slightly and these price increases push too far, we could end up limiting the pool of buyers who can afford what we offer. This, of course, is a market-by-market equation.

Second, economists worry about the risk of inflation. Economists have been warning about this for a while, and it hasn’t come to fruition yet, which is a bit of a puzzle on its own. If inflationary pressures were to emerge, buying power would shrink, and the pool of buyers who could afford most new homes would shrink with it.

Third, it’s possible we’re already inside of a new asset bubble. Rather than housing, though, the bubble is effectively about the stock market itself. With the FED lending trillions of dollars to ensure liquidity and Congress spending trillions more, there is limited risk for investors right now. The market is being propped up, as is evident between the total disconnect between main street and Wall Street. The bottom 50% of the country continues to experience Great Depression-level financial challenges while investors see wild gains.

How long can this situation hold up? Who knows. If there is a bubble, and it did pop, would that mean we see a repeat of 2008? That’s unlikely, though possible if the losses and debt burdens were spread across the entire financial system. Again, there’s no way to know if this will happen, let alone how bad it would be. It may be hard to remember in light of the pain of the Great Recession and the shock of the pandemic, but there are such things as normal recessions that don’t destroy the entire economy.

With all of these considerations at play, here is how we’re advising our partners to move forward in the near term. First, it’s important to place energy on how to provide affordable housing for buyers and how affordability is moving and shifting in different markets. Second, because the affordability puzzle is so fluid, limit exposure to land purchases that tie you up for many years with limited flexibility. Finally, remember that the consumer experience has fundamentally changed in the last year. You should embrace that fully, as we’re never going back. As more Millennials and Gen Zs enter the market, their expectation and interests are going to be very different from that of the previous generation — virtual sales will be a long-term focus, and it’s vital to our industry’s success to get up to speed.