Natalie Campisi | Jan 4, 2021
The housing market has been struggling to keep up with demand since the 2010s, when the number of new homes built was slashed in half compared with the previous decade. As the demand for residential real estate has increased, the scarcity of homes for sale has created a logjam on the supply side.
Millennials—who make up approximately 38% of homebuyers’ share—are getting married and having children and, in effect, looking for a home, either their first or second. With so many motivated buyers in the market, you end up with multiple people bidding on the same house, which triggers price increases. Affordability issues then naturally arise.
Here’s a look at what experts think will happen in 2021, and how you can put yourself in the best position to make a good deal. (Hint: it’s not the best news if you’re looking to buy a house, especially if you’re a first-time homebuyer.)
Problem: There Aren’t Enough Houses
“Currently, there are fewer than three months of supply of homes on the market, the lowest on record since the turn of the century,” says Matthew Speakman, an economist at Zillow.
Coming into the 2020 recession, there was a supply shortage of 2.5 million units, according to research by Freddie Mac. Residential construction began to slowly ramp up in the latter half of 2020 (thanks to motivated buyers) after Covid shut down home building in the spring, typically the busiest season for new construction.
Despite the many roadblocks homebuilders face going into the new year, experts are cautiously optimistic about 2021.
Potential Solution: Is A Building Boom Coming?
“Builders are going to be really busy (in 2021). There’s a renewed interest in housing after (people have been) crammed into a small apartment or house during Covid lockdowns,” says Danushka Nanayakkara‑Skillington, associate vice president, forecasting and analysis, at the National Association of Home Builders (NAHB). “Now, more than ever, people want more space. New construction on single-family homes could exceed 1 million (in 2021).”
That would be a big deal. The last time single-family housing starts broke 1 million was in 2007 (1.046 million). There was a sharp decline in 2011, when single-family starts dropped to 430,600. Since then construction has steadily risen. In 2019, there were 887,700 single-family home starts.
In 2021, the Mortgage Bankers Association (MBA) forecasts single-family housing starts to be around 1.134 million. And that could just be the beginning, as projections going forward are even rosier: 1.165 million single-family homes in 2022 and 1.210 million in 2023.
What’s more, we also should see more entry-level homes under construction in 2021, says Joel Kan, associate vice president economic and industry forecasting at the MBA. That could help a potential pinch point, as too many entry-level buyers are helping to push up prices, making those homes unaffordable for that very group.
“We’ll see more affordable homes come onto the market as builders try to meet demand for these homes,” Kan says.
Problem: Construction Hurdles Will Remain in Place
Even with more new homes under construction, the problems facing the construction industry are sure to linger in 2021 and beyond. Without a sea change from the government and the construction industry itself, inventory will remain below needed levels, says Robert Dietz, senior vice president and chief economist at the National Association of Homebuilders.
Construction is up against the same problems it’s faced in years past: increased lumber prices, limited lot supplies, supply-chain issues, restrictive zoning laws, costly permits and a skilled labor deficit.
These problems make it almost impossible for homebuilders to make a profit on entry-level homes, which is the price point that’s hurting the most in today’s market.
“We lost about 1.5 million workers, who either lost their job or quit during the great recession. These were tradesmen, electricians and carpenters. We’ve added back about 900,000 over the last decade, but we still need more people in the pipeline,” Dietz says.
Dietz points to the slowdown in immigration and the lack of women in construction as two major contributors to the talent shortage. About 75% of workers in the construction industry are Americans, but many don’t like that the work is seasonal and physical, according to NAHB surveys.
Potential Solution: Builders Say They Need Government to Act
Supply costs also are up, thanks in part to the lumber tariffs. If the incoming Biden administration works out a new deal with Canada, builders might start to see some easing on lumber costs.
“We’re trying to bring down lumber prices, which are very high right now. In April it was around $350 per thousand boards. Then it peaked in September to $955, now it’s at around $600,” Nanayakkara‑Skillington says.
Along with steep supply costs, strict zoning laws make it costly and challenging to build in some of the areas that need housing the most, like California.
Some of these laws are championed by residents who don’t want multifamily zoning in their neighborhoods. Homeowners vote against multifamily construction, which drives up land costs. This is profitable for existing homeowners, but it makes it tougher for some would-be buyers to afford a home.
“Over the last 20 or 30 years, various regulatory burdens, particularly with land, have gotten tighter and tighter,” Dietz says. “There are greenspace requirements, there are also exclusionary zoning laws, which basically income segregates. Without a serious change in policy, these inventory problems will persist.”
Problem: People No Longer Need Big-city Living
When workers were asked to stay away from their offices in 2020, it set off a domino effect that likely will spill over into 2021. Working from home allowed people to reexamine what they needed and what they didn’t. And many decided that they didn’t need an expensive apartment or house in a pricey city. So off they went to the suburbs, exurbs and even the country.
It’s not surprising then that the most significant growth areas are in the South and Southeast, especially Houston and Dallas in Texas, Florida and the Carolinas.
On the West coast, the mountain states are thriving. Places like Idaho, Colorado and Utah have seen growth thanks to people from expensive coastal cities looking for more space and a lower living cost.
“There are some things in common between the Southeast and the mountain states that make them high-growth areas. They have pro-business environments, more land and they’re both easier and cheaper to get building permits,” Dietz says.
Dietz says the Midwest is also growing. Places like Kansas City, Kansas and Indianapolis also did well last year.
Solution: Buyers Are Going Where Housing Is Cheaper
“The most important housing story out of 2020 is the suburban shift in housing demand,” Dietz says. “The growth rate in home construction is stronger in lower-cost and lower-density markets. The places where there is weakness are high cost, highly regulated areas. Eventually, people who can’t find affordable homes in California or New York will vote with their feet and move to Texas, Utah (or) Idaho.”
After the vaccine, there might be some geographical shifts again, with some homebuyers returning to cities. But with major tech companies like Oracle and HP Enterprise moving their headquarters to Austin, Texas and Tesla building its new Gigafactory in Austin, there seems to be a collective consciousness shift in where people want to be.
Whether it’s the strict laws or high taxes, it’s clear that many folks are looking for a change that has less of a sledgehammer effect on their wallet.
“Bay Area workers are leaving the city. If big-tech companies say employees can work from home permanently, why would people stay?” Nanayakkara‑Skillington says. “This is a trend we will see in the coming years, people telecommuting and living in areas that make more sense financially. That will affect where construction happens, too.”
3 Tips for Homebuyers in 2021
If you’re a homebuyer in a seller’s market, your options are limited. Because there’s less construction, you have fewer new homes to choose from. Older homeowners may also be choosing to age in place, which is keeping many homes off the market. But you can make the best of a not-entirely-ideal situation.
1. Expand Your Search to the Exurbs
Some motivated buyers are choosing to move farther away from expensive urban cores. This is one strategy that might be helpful for buyers on a budget who have the flexibility of working from home.
As people have been deprived of cultural diversions like concerts, gallery openings, nightclubs and theaters, some have realized that a comfortable home is more valuable than what they can get from a city. Because prices tend to lower in less densely populated areas, you’ll likely get more for your dollar in the exurbs than if you contain your search to a big metro area.
2. Prepare Your Financing Before You Start Looking
Another hurdle buyers are facing is competition. It’s not unusual to get into bidding wars as more people compete for fewer homes, especially on the entry-level side of things. This means that it’s even more important to get your financing in order before you start house hunting.
It can be heartbreaking to find your dream home only to have a no-contingency cash buyer swoop in and take it. Of course, this can happen even with financing at the ready, but it’s always better to have a preapproval letter in hand if you plan on using a mortgage to buy the home.
A preapproval happens after you supply your financial documents to the lender and undergo a credit check. This is a more involved process than prequalification, which is a tool that just gives you an idea of what you’re eligible for based on what you say you earn.
Keep in mind that deals fall through all the time, so even if you get outbid at first, you still might end up getting the house if that buyer doesn’t come through with financing. By having a preapproval letter, sellers will take you more seriously when you make an offer than someone who doesn’t have backing from a lender.
3. Take Your Time
Don’t rush into buying something that you might regret buying later. The cost of buying a home can take years to recoup, as closing costs can run between 2% to 5% of the loan amount. That means if your home loan is $400,000, closing costs can end up being anywhere from $8,000 to $20,000 depending on your loan, whether you buy points and how much your lender charges in fees.
Most experts recommend only buying a house if you plan on staying in the house for at least five years, which will give you enough time to build up equity so that when you do sell you don’t end up owing money after the sale. If you rush into a home you’re not sure about and end up hating it you could either be stuck there until you build up equity or decide to take the loss and move. Either way, this is not a great situation to be in.
And remember, if you do sell before you make up those closing costs and decide to buy another house, you’ll end up spending a lot of money on fees that you could have saved if you waited.