Will the Housing Market Cool in 2021?

It’s been a rough couple of months for anyone looking for deals—particularly on the MLS. People just haven’t been selling their houses. It makes sense that inventory is low. With all the uncertainty about the economy, people are using their homes more than ever. Plus, who wants strangers walking around in their lockdown palace?

Will more properties be listed soon?

According to data provided by the Federal Reserve, inventory bottomed out nationally in October, hitting levels we haven’t seen since 2004. This has led to one heck of a seller’s market over the last couple of months. An agent friend of mine recently told me a place in Denver he was bidding on for a client went for $76,000 over asking. Whoa.

According to Zillow, the median home value (basically, the average of all Zestimates) is up 9.9% this year nationwide. That’s insane! No, Zestimates aren’t always accurate for any given property, but when that data is aggregated it tends to be directionally correct.

As of February 2021, things may be changing. That month’s supply index for homes in the U.S., jumped up to 4.8, which is the highest level we’ve seen May of 2020. For reference, the average for the four years leading up to the COVID-19 pandemic was 5.6—we’re coming back!

According to some new research from Clever Real Estate, about 43% of homeowners surveyed in March said that the pandemic delayed when they were going to put their home on the market. No wonder inventory has been so shockingly low.

But the good news: People seem eager to list their properties soon. In fact, 45% of the 43% who delayed listing said they plan to list their property by June. Another 13% plan to list their home between July and August, and 13% more before the end of October.

If all the intentions from this survey pan out, we should see a huge uptick in inventory over the coming months.

What happens if inventory increases?

Supply and demand tells us that, generally speaking, when supply—or housing inventory—increases, prices will fall, presuming that demand remains constant. Simply put: When there are more houses for the same number of buyers, buyers don’t have to compete as hard as they do now for a limited supply of properties.

My guess is that if this supply glut does come to fruition, we won’t see listing prices drop, but we will see a decline in properties going for significantly over asking.

Unless, of course, mortgage rates continue to rise. As I recently wrote on the BiggerPockets blog, recent inflation news could potentially push mortgage rates higher over the coming months. Even if the rates do climb, however, they’re likely to still stay extremely low—at least from a historical perspective. But these two factors converging could really slow down the craziness we’re currently seeing. Less competition from buyers plus more expensive mortgages feels like a recipe for returning to more normal growth rates.

Good news from the Bureau of Labor Statistics

Some other positive news about the housing market accompanied the recent news from the Bureau of Labor Statistics.

Housing affordability remains really high because mortgage rates are still so low from a historical perspective.

And secondly, foreclosures remain low. It’s hard to know if the foreclosure numbers are being impacted by government policy, or if they’ll tick up if and when government support ends.

But overall, the data points to a more sustainable and stable housing market come summer 2021.

I’m curious to hear what everyone thinks about a cooling housing market. Personally, I think it would be a good thing. This level of appreciation is unsustainable, and I would like to see more stable growth—an environment that allows for more confident investing. What are your thoughts?

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.