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What to Expect from the Real Estate Market as We Wrap 2021

It’s been a wild ride for the real estate market. Nationally, regionally, and right here in San Diego, the past two years have brought up and downs, starts and stops, positives and negatives. What might the fourth quarter of 2021 bring? We won’t pretend to have a crystal ball, but we can make an educated guess.

Let’s look at a few of the most important factors to see how the market is doing right now. With this knowledge, we can take a guess at where it might go…

Fourth Quarter 2021: What to Expect from the Real Estate Market

There are countless factors that you can research when trying to understand the real estate market. Honestly, most of them are overly detailed and trivial. To get a mental grip on the real estate market, it’s best to focus on three factors: 1) the supply of available housing (often called “inventory”), 2) the cost of housing, and 3) interest rates.

Housing Supply (Inventory)

While many focus on housing prices in the real estate market, you could argue that housing supply is actually more important. As basic economic theory tells us, as supply goes down, prices go up; if more people are trying to buy fewer homes, it’s inevitable that housing prices will increase. That doesn’t tell the entire story for today’s pricing (spoiler: pricing is high), but it is certainly a major factor.

Housing supply, to put it bluntly, is low.

But it’s getting better.

According to the Federal Reserve Bank of St. Louis, in August of 2021 there were 640,716 active listings in the United States. This sounds like a fairly large number, but it’s low when compared to other times. In August of 2016, there were over 1.5 million active listings! In other summers, inventory tended to hover around 1.4 million.

Since the start of the pandemic, inventory decreased rapidly, losing numbers month by month until they bottomed out at roughly 490,000 in April of 2021. Now we are seeing a steady increase. Every month since April, numbers have steadily increased, a sign of hope that inventory issues could be eased in the near future.

Will Housing Supply Improve?

In the fourth quarter of 2021, it’s seems likely that the housing inventory will continue to rise. (Although this is certainly not guaranteed.) There are two reasons to be optimistic about the real estate market. First, more homeowners listing their houses. Second, more new homes coming to the market.

It’s likely (but not guaranteed) that more homeowners will place their houses for sale in the near future. As COVID vaccines become more common and people become more comfortable with showing their houses, it’s likely that existing homes will start to increase. This may be a two-steps-forward, one-step-back process, but it’s steady progress at the very least. 

New homes should also start to increase. Starts on new housing was virtually halted during the spring and summer of 2020, but construction activity has increased, and these homes should start to become more available as we move towards the end of 2021. By the start of 2022, it’s entirely possible that housing inventory will start to look “normal.” If we can get the number up to 1 million, many of the issues impacting the housing market will start to ease.

With more inventory, it’s possible that the real estate market could see stabilizing prices.

Housing Prices

Housing prices are the factor most felt by consumers. Supply may lead to high prices, but it’s the pricing itself that hits homebuyers directly in the wallet. Home prices have been climbing for a while, with steady increases throughout the years. With a sharp decline in inventory, however, home prices took a massive rise.

There are many different sources that provide information on U.S. housing prices. Redfin, one of the largest real-estate-information websites, says that the median sale price for a home in the U.S. was $380,271 in August of 2021. This is up significantly from the year before, but actually a decline from recent months.

If we look back to September of 2016, the median home sale price was right around $250,000. It rose steadily, but hovered around $290,000 to $300,000 for most of 2019. In the summer of 2020 median sale prices rose to around $330,000, but things took off in early 2021. From January to June, the median sale price rose from below $330,000 to over $385,000!

According to Redfin, home prices peaked in June of 2021, when the median home sale price was $385,706. Since then, there has been a modest but consistent decline in sale prices. With a $5,000 drop in the past two months, it’s hopeful that prices will continue to ease, which will likely depend on the availability of for-sale housing.

What will Happen to Housing Prices?

It seems likely that housing prices will remain steady. While a sharp decline is unlikely, a massive increase is also unlikely. With more homes entering the market, inventory concerns will probably ease, which means buyers will have more selection.

Interest Rates

Interest rates on mortgages (and other types of loans, for that matter) have been historically low for some time. Before the pandemic, the Federal Reserve kept base interest rates low to encourage market activity and help sustain the growing economy. Since the pandemic, interest rates have remained low in an effort to help the market recover. For borrowers, there is still a chance to purchase a home with some of the lowest interest rates we have ever seen.

While low, mortgage rates have ticked upward. In August, they went up about an eight of a percentage point (0.125%). It’s not uncommon for most borrowers to find loans with interest rates below 3%, assuming you have strong credit, a healthy downpayment, and a reasonable debt load.

Are Interest Rates Going to Climb?

It seems likely that interest rates will continue to trend upward. This prediction, however, is based on the assumption that COVID concerns steadily decrease and people return to a relatively “normal” life with “normal” real estate activity.

If, however, COVID continues to take a toll on the nation and the economy is sluggish, you can expect interest rates to remain low.

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