Mortgage rates around 3% (and under) will continue through at least the first half of 2021, but how about the low inventory? The number of homes for sale at the end of 2020 was 38% lower than it was the previous year, so we started out in 2021 with the lowest inventory ever for any new year!
But I don’t think it will last . . .
Do we have a pent-up supply waiting to burst onto the market? Possibly!
Here are my categories where I think we will shave additional homes come up for sale, roughly in the order of the most likely contributors:
1. Move-Uppers – Covid-19 changed what we want from homes. Low rates/high equity make it possible!
2. Baby Boomers – A survey said that half of the seniors delayed listing their home in 2020 due to Covid-19.
3. Politics/Taxes – Many Californians have had enough. The migration trend to other states should ramp up.
4. Work From Home – This trend frees up many to move…..up and out!
5. Forbearances – Lenders will be lenient, but some in default will tap their equity, rather than risk losing it.
6. Prop 19 – Enables 55+ homeowners to take their low property-tax basis with them. Though this won’t be the sole reason to move, it makes for a nice sweetener – and may be the last straw to make it worth it.
7. Divorce Rate is Up 34% – Technically, this could add more sellers AND buyers, but realistically those coming out of a divorce will be more likely to split their equity and take a break.
8. Unemployment – Older homeowners will grapple with taking a pay cut or quitting the job search altogether – and retiring earlier than expected won’t seem so bad when their home’s equity has never been so high. More boomer moves that would have happened in 2022-2025 will be pulled forward.
9. Eviction Ban – In the second and third quarters of 2020, there were 11% of renters missed a payment. Mom and pop landlords will begrudgingly sell and pay the capital-gains tax, rather than risk another episode like this one.
10. Capital-gains tax. – From the WSJ: Biden will raise the tax on the capital gains of high earners to the same rate as wage income, increasing the rate to 43.4% (39.6% plus Medicare 3.8% investment tax) from 23.8%. Mr. Biden estimated that these increases on high earners would raise $92 billion, but that’s before they put their tax lawyers to work. Biden has also said he will eliminate the 1031 exchanges, but all of the above will need Congressional approval. Just the thought could cause landlords to hurry up their plans of selling.
The potential home sellers that are in more than one category (and have more motivation) will be the first out – which means we should get off to a fast start in the first quarter. We probably won’t see a flood, but it will only take 10% to 20% more sellers to change the game dramatically.
My 2021 Predictions:
1. We will have 10% more NSDCC listings than we had in 2020.
2. We will have 10% more sales.
3. We will have a 10% increase in the NSDCC median sales price.
And that, my friends, is what a FULL-BLOWN FRENZY looks like.
The only hurdle is supplied. Will there be enough people willing to sell?
Let’s break it down to a specific number because we’ll see that achieving 10% more sales isn’t that far out of the question. How many more people need to sell? Here is the breakdown of 2020 listings and sales:
NSDCC 2020 Listings and Sales by Area (as of Dec 30th):
Does my guess of +10% in all categories look and sound crazy?
It looks feasible that we could have an additional 319 sales this year, and get us to 3,500 total. If we pick up an extra 200 sales in Carlsbad, we only need another 119 in the pricier parts of town.
The median price going up to $1,626,900? We know that sellers will be tacking on their habitual extra mustard to their list prices, so $1.6-ish for the year is definitely within range.
Could we have 4,969 listings this year?
This is the big question, but it’s not some crazy number we’ve never seen before – in 2016 we had 5,182 listings and 3,104 sales when mortgage rates averaged 3.65%.
Having an extra 452 houses to sell means 1-2 more listings per day – I wouldn’t call that a flood – and it’s about the right number to whip buyers into a feeding frenzy without creating a glut.
So how will we see this frenzy?
You won’t see the signs of the frenzy everywhere, and probably no signs in the $2,000,000+ market.
But anywhere you have one-story houses on culdesacs for under $1,000,000 should be cooking:
We’ll be all frenzied up for the next few months – when will it cool off?
The real estate market will likely mirror the course of the pandemic.
You’ve probably heard the comparison to the Roaring 20s – the boom that kicked off when World War 1 and the Spanish Flu of 1918 were over and automobiles and telephones fueled the new economy. Just the relief of seeing the coronavirus beginning to clear should cause more people to get out and about….but getting back to normal could mean less real estate frenzy.
Mortgage rates will reflect the improvement, and rise accordingly.
When homebuyers hear that rates are going up, they will be tempted to hit the brakes and wait until sellers start lowering their prices to compensate. Think sellers will lower their prices? Me neither, and the market will probably stall out for months or years, much like it did after the Rocking 2013 Frenzy.
My guess is that we have six more months of frenzy in the bag.
But there will be enough other distractions that the super-hot market will fizzle out by July/August.
Or the first day that mortgage rates hit 3.50%, whichever comes first!
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Jim and Donna Klinge
Klinge Realty Group @ Compass
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