First American: Housing Market Fundamentals To Remain Constant In 2021

First American: Housing Market Fundamentals To Remain Constant In 2021

December 21, 2020
Photo of 2021 written out in sparks.

First American Financial Corporation's proprietary Potential Home Sales Model for the month of November 2020 is predicting "strong underlying fundamentals" to remain constant in 2021.

"The housing market continues to impress, even as it enters the colder months, which is traditionally real estate’s slow season. After falling to a near-decade low in May due to pandemic-driven pressures, existing-home sales hit a 14-year high in October," said Mark Fleming, chief economist at First American. "In November, our measure of the market potential for existing-home sales increased 10%, compared with one year ago, to a 6.05 million seasonally adjusted annualized rate (SAAR) of sales. While the housing market rebound has been nothing short of incredible, the forces driving the rebound existed prior to the pandemic. Looking ahead, the good news for housing market potential is these fundamental forces are likely to remain constant throughout 2021."

First American notes the rising house-buying power, millennial demand, the limited supply of inventory and rapid house price appreciation are housing market constants that will continue to propel the 2021 housing market.

"How much home one can afford to buy given their income and the prevailing mortgage rate is a primary driver of home-buying demand. Compared with one year ago, falling mortgage rates and rising incomes for those still employed resulted in nearly more 352,000 potential home sales," said Fleming. "Consensus forecasts estimate the 30-year, the fixed mortgage rate will likely average 3% next year, with forecasts ranging from 2.8% to 3.3%, so house-buying power is expected to remain strong in 2021 and continue to drive demand for homes."

Limited supply has been creating issues for the housing industry before the COVID-19 pandemic, however, an influx of buyers were more affordable interest rates has significantly depleted the supply of homes for sale. Fleming notes that it could take years to make up for the decade-long gap.

Additionally, Fleming believes home price appreciation will remain strong in 2021.

"Strong demand from home buyers armed with robust buying power combined with limited supply results in heightened competition and bids up prices, a dynamic that defined the housing market in 2020. Faster house price appreciation resulted in a gain of approximately 160,000 potential home sales in November due to rising equity levels," said Fleming. "As homeowners gain equity in their homes, they are more tempted to consider using the equity to purchase a larger or more attractive home. The allure of the more attractive house can help encourage more homeowners to list their homes for sale. This partially explains why home sales in the highest price tiers experienced the greatest year-over-year growth in October. Since the supply and demand dynamics will continue in 2021, we expect to see continued house price appreciation."

Fleming also believes that the increase the industry has been seeing in millennials homebuyers will continue as millennials get older and begin to form their households.

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