The Economy and Housing Market in 2021

Sustained momentum in the economy and housing market will carry over into the year ahead

By LAWRENCE YUN AND NADIA EVANGELOU

As we move into 2021, most of us would say that 2020 has been nothing like the year we anticipated. 2020 indeed brought big challenges and changes to the entire world. Twenty million people lost their jobs within a month. Millions of businesses closed. One in three adults substituted some or all of their typical in-person work for telework, compared to one in twenty adults that worked remotely before the pandemic. Millions of people relocated from big city centers to the suburbs and smaller cities. While no one can say how long the pandemic will last, some of the trends that arose in 2020 are likely to remain even after the end of the pandemic. Expect 2021 to be a transition year back to our “adjusted normalcy,” including some of these changes and new trends. However, this transition will impact sectors in different ways.

Expect the strong momentum in the real estate market to continue in the next year with existing home sales growing by nearly 10% in 2021.

Economy in 2021

The economy is still recovering from the pandemic, with rising coronavirus infections and new lockdowns. Nevertheless, a robust recovery is just around the corner as coronavirus vaccines move closer to distribution. Indeed, a surge in consumer activity is expected to take place once pent up demand is unleashed especially in the beleaguered travel, leisure and hospitality industries. Consumers saved like never before during the pandemic while personal and wage incomes are higher than pre-pandemic.

Job market

Twenty-two million jobs were lost in the beginning of the pandemic. Eight months later, more than half of these jobs have been recovered. (Courtesy of NAR)
Twenty-two million jobs were lost in the beginning of the pandemic. Eight months later, more than half of these jobs have been recovered. (Courtesy of NAR)

Twenty-two million jobs were lost in the beginning of the pandemic. Eight months later, more than half of these jobs have been recovered. In the meantime, the unemployment rate also recovered more than halfway to 6.9% in October compared to 14.7% in April, moving closer to the pre-pandemic level of 3.5% in February. Although job growth has slowed in recent months with November’s gains the smallest since the beginning of the pandemic, it’s promising to see that most of the key labor market indicators are more than halfway back to pre-pandemic levels. However, recovery is slower in some industries, especially those that were hurt the most. For instance, employment in leisure and hospitality is 3.4 million below February’s level while employment is down more than 40% in the performing arts.

Expect unemployment rate to drop to 6.2% in 2021 with a further decline to 5.0% in 2022.

Inflation and Economic Growth

In the third quarter of 2020, the U.S. experienced its fastest three months of economic growth on record, with the GDP rising by 33% compared to the second quarter of 2020. However, the economy is still behind the peak activity. In the upcoming year, GDP growth is estimated to grow by 3.5%. In the meantime, inflation is expected to rise to 1.7% in 2021 but staying below the 2% target. As the coronavirus vaccines will be distributed soon, some of the main components of the Consumer Price Index (CPI) are expected to rise such as air fares and hotel rates.

Housing in 2021

Home Sales

There is no doubt that the housing market is outperforming in the economy. We no longer talk about a recovery of the real estate market from the pandemic; in fact, home sales activity hit a 14-year high with home sales reaching nearly 6.9 million homes in October. That was a 27% increase of home sales from a year earlier. In the meantime, mortgage rates have stabilized below 2.9% for nearly three months, boosting home buying activity. Expect rates to hike no higher than 3.1% in 2021. With these ultra-low mortgage rates, homebuying is more attractive.

Expect the strong momentum in the real estate market to continue in the next year with existing home sales growing by nearly 10% in 2021.

Home prices

However, demand is far surpassing supply across the nation and home prices continue to increase, eroding affordability. Specifically, inventory continues to drop, reaching record lows. Actually, we have been underproducing for the past decade. In October, the inventory of existing single-family homes for sale dropped to 2.4 months’ supply, the lowest in the entire history of the data, while 6 months’ supply is what we need to have.

As a result of the growing imbalance be- tween housing demand and supply, home prices are expected to rise 8.0% in 2021 and 5.5% in 2022. In the meantime, housing starts will likely rise to 1.50 million next year and 1.59 million in 2022. However, more construction is needed to accommodate growing demand.

Trends in 2021

Telework to remain after the pandemic

Some of the trends that emerged or accelerated during the pandemic are here to stay. By generation, teleworking is more popular with millennials, which made up the largest generation group in the U.S. in 2019 with an estimated population of 72.1 million, surpassing baby boomers. According to the U.S. Census Bureau, 43% of adults in the age group 25-39 worked remotely as of the end of November. In the meantime, according to LinkedIn, among people who have returned to the workplace, millennials (ages 24 to 39) are the most likely to voice concerns related to safety and lack of sick leave and remote work policies. While many companies already provide telework as a permanent option for their employees, expect telework to continue long after the pandemic even if it is two or three days per week working remotely.

Suburbs and smaller cities to continue gaining population

Large cities lost the most people during the first seven months of the pandemic. For instance, most New Yorkers moved to Brooklyn (33%), Hamptons (29%) and Jersey City (8%). Respectively, most San Franciscans moved to a county in a radius of less than 60 miles away from their previous home. (Courtesy of NAR)
Large cities lost the most people during the first seven months of the pandemic. For instance, most New Yorkers moved to Brooklyn (33%), Hamptons (29%) and Jersey City (8%). Respectively, most San Franciscans moved to a county in a radius of less than 60 miles away from their previous home. (Courtesy of NAR)

With teleworking at record high levels, people also decided to move for various reasons during the pandemic. Some of them sought out bigger houses with bigger yards for their kids to play in and office space for them to work. Others sought more affordable homes in less dense places away from large city centers since they can telework. It is obvious that far fewer people are moving for job-related reasons than they used to do pre-pandemic. According to USPS data, most people moved close to their previous home with the suburbs gaining the most movers during the pandemic. As the data shows, large cities lost the most people during the first seven months of the pandemic. For instance, most New Yorkers moved to Brooklyn (33%), Hamptons (29%) and Jersey City (8%). Respectively, most San Franciscans moved to a county in a radius of less than 60 miles away from their previous home.

Expect migration to the suburbs to continue in the year ahead especially in city centers with weakening affordability.

Overall, housing will continue to be a significant driver of the U.S. economic recovery. Low mortgage rates, demographics, and telework are some of the factors that will continue boosting housing activity in the year ahead.

Lawrence Yun is chief economist at the National Association of Realtors. Nadia Evangelou is a senior economist and director of forecasting at the National Association of Realtors. Learn more at nar.realtor.

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