Zillow Senior Economist
This is the fourth installment of our economist Q&A series, as we work to answer the top 2021 housing market questions. Every Tuesday in December, HousingWire interviewed a top economist in the HW+ Slack channel. The 2021 housing market forecasts have focused on everything from home prices to mortgage rates.
In this installment, HousingWire interviewed Jeff Tucker, senior economist at Zillow, on his forecast for next year. This article has been lightly edited for length and clarity.
HW: You start your commentary with a bold prediction: The 2021 housing market will be stronger than 2020. What is one of the greatest reasons for this forecast?
Jeff Tucker: Great question to kick it off! We have been keeping a close eye on the decline in active inventory, which I think is the most reliable leading indicator, and its movement this year has been nothing short of jaw-dropping. By Zillow’s count, there are at least 1/3 fewer active listings now than this time last year, with even bigger shortfalls in many metros and submarkets. I can give a quick preview of our upcoming breakdown of suburban markets in particular, where we are approaching 50% year-over-year declines in inventory.
That suggests a huge shortfall of supply relative to demand. It took months to dig this inventory hole, so even if the net flow of active listings turns around, it would take months to dig our way out again. In the meantime, buyers are competing over an incredibly small pool of options, leading to multiple-offer situations and very quick sales, in a vicious cycle of rising prices (virtuous for home sellers, of course, unless they’re trying to trade up!)
HW+ member: That is a massively bullish forecast for EHS in ’21. What’s the basis for it?
Jeff Tucker: Our forecast is 6.9 million homes for 2021. As a starting point, that was basically the same annual number as the October 2020 SAAR pace of sales, and obviously a little higher than the November SAAR numbers that NAR shared today. Our optimism to maintain or expand this fall’s pace comes from the possibility of more sellers coming out of the woodwork next year, and the evidence of a lot of pent-up demand on the buyers’ side.
HW: Will we see the typical “home-buying season” in spring 2021 or do you think it will continue to be strong through the whole year?
Jeff Tucker: It will be a much more muted seasonal swing this year, but I still expect to see one. Nothing is quite the same in the pandemic world, but people are still taking a break for the holidays, and they will still angle to close on their homes and make their moves while their kids are out of school, which means shopping and making offers in the spring.
The interesting thing this spring is that days-on-market are already so rock-bottom, it may be hard to even tell the difference from winter on that metric, but I do expect sales volumes to have more of their typical seasonal pattern, especially in particularly “swingy” metros. Late next fall might be the first time we see a real seasonal dip again, if some of this pent-up demand has run its course.
I think one of the biggest long-term questions is whether the pandemic has shifted the behavior of seniors – made them less likely to downsize? More hesitant to move to assisted living facilities or retirement villages? Some reporting in the WSJ has suggested that for instance, nursing homes have many fewer people in latter half of 2020. Is that temporary? I don’t know.
We did ask a bunch of homeowners this fall what might be holding them back from selling. Clearly “uncertainty” is a big factor, and hopefully if a vaccine helps resolve that, we could see more people coming back to the market selling their homes.
HW: You talk about a demand surge in your piece that will push home price appreciation into the double digits for the first time since 2006. Is the 2021 housing market at risk of becoming unaffordable and locking people (especially first-time homebuyers) out of the market?
Jeff Tucker: So far, interest rates have gone a long way to offsetting rising prices, when it comes to monthly payment affordability. We dug into that here. But this idea of an affordability ceiling is a major risk, especially in certain markets.
We are already seeing a large swath of well-qualified, middle-class workers who are currently renting and unable to afford to buy in their home markets. The advent of working from home might ameliorate that for some people. But a lot of people are not fully able to take advantage of that.
My colleague Treh Manhertz did a cool analysis of ACS data to estimate how many such people (renters who can afford a typical American home but not one where they live, who might be able to WFH) are out there, and he found that it could especially help more minority renters achieve homeownership.
HW+ member: Lenders are rounding out 2020 with a big backlog of pipeline deals (both refi and purchase) that are expected to close in Q1. This backlog includes October deals that are taking forever to close and late Nov / Dec apps. How does this Q4 pipe (inflated by rising days to close metrics) impact Q1 (and maybe Q2) forecasts?
Jeff Tucker: Honestly, our forecasts do tend to assume a more smoothly functioning mortgage market, and you’re absolutely right that the backlog has begun to trip people up on closing on time. Shooting from the hip, this gives me more confidence in mid-2021 strong sales volumes, as a lot of buyers are stuck waiting in line to close. It’s one more factor, along with inventory shortage and getting out bid, that will keep pushing the closing date further back for buyers.
HW: What can real estate agents and/or brokerages do to make sure they are staying competitive in this environment and in the 2021 housing market cycle?
Jeff Tucker: I don’t want to talk my book coming from Zillow, but I think it’s undeniable that buyers are doing a lot more of the browsing, filtering, and home selection process on their own, using websites and apps like ours. Our site traffic growth this year was remarkable, after we saw it dip at the start of the pandemic and feared it would stay down for a while.
What that means for agents is that their most important role is as a dealmaker: Help your clients make competitive offers on the right homes, and help them close on time. Those skills are more valuable than ever in a market like this.
HW: You said due to low interest rates, monthly payments for home buying remain more affordable than renting. What type of interest rate or home price increase would we need to see before they would be better off renting?
Jeff Tucker: This is a fantastic question and unfortunately I have to say it really, really depends on that household’s individual circumstances! How long do they plan to stay put? What kind of upfront costs are they dealing with on that purchase?
Broadly, I’d say in most of America right now owning remains incredibly attractive relative to renting, but in some markets like San Francisco, Los Angeles, and Manhattan, it is a dicier proposition. In fact, I think that is one reason we saw a bit of a condo inventory buildup, especially in SF and Manhattan, earlier this year — those are two submarkets where purchase prices are pretty skewed from rents
HW+ member: Dovetailing on your article on formation rates, any specific population segment that you foresee to have higher YoY formation rates vs. others in ’21?
Jeff Tucker: Thanks for spotting my recent work! I’m actually working on a followup much more geared toward nitty-gritty forecasts in the next few years. Fastest growing household counts are absolutely in the 30-34 age range, mostly because of the extra few million people entering their early 30s, but also due to their rebounding headship rates. It remains to be seen if that rebound got cut short by the pandemic recession
HW+ member: To compare to the 6.9M, do you have a new home starts number?
Jeff Tucker: Nope, sorry, we aren’t forecasting housing starts just yet. Shooting from the hip again, I would love to see 1.5M, like we had this fall and last winter on SAAR basis. Builders have the confidence, the only question is whether they can find the labor and land to deliver.
I’ve been slightly skeptical of the “death of cities” narrative this year, but I’ll grant that widespread working from home might make exurbs more attractive than a few years ago, which could help builders forge ahead with new subdivisions on marginal outlying land where it’s a lot easier to build. Riverside – San Bernardino has seen amazing home sales numbers since the pandemic began!
HW: Do you think home purchase tech innovations will continue to make headway in 2021, even if the COVID-19 vaccine is effective in reopening the economy?
Jeff Tucker: I do think a lot of innovations are here to stay! 3D home tours have really taken off this year, and they continue to offer people a great way to get a feel for the layout of homes, without having to drive all over town to 20 open houses every weekend. And when it comes to closing, I think eNotary services, and online mortgage shopping are absolutely taking off. Millennials and Gen Z shoppers expect home shopping to be as online as everything else they do.
HW: What is the greatest factor that could make you change your 2021 forecast?
Jeff Tucker: Mortgage rates. I don’t expect a drastic liftoff in rates, especially after they took all the bullish vaccine news in stride this November, but you never know — that’s why if it happened, it would change my forecast! If we see a major reappearance of inflation and just generally super bullish economic news this coming year, rates could march higher eventually.
And while I think most U.S. housing markets are pretty resilient to some modest rate hikes (like 3.0 to 3.3%), we saw a couple years ago that the priciest places are pretty rate-sensitive at this point. The affordability ceiling will drop down and start bumping a bunch of Millennials on their heads, and keep them out of homeownership, in places like LA, Seattle, etc., if we see mortgage rates above 3.5% again.
HW: Any other closing thoughts or thoughts on the 2021 housing market?
Jeff Tucker: I guess I’d just like to temper the bullish take on the for-sale market with some concern for renters — there are still a LOT of people struggling to pay the bills. The pandemic recession has fallen unusually hard on renters, and while the latest economic relief package helps, it seems like we keep just barely throwing a lifeline at the last minute for renters struggling to keep a roof over their heads. Hopefully this bill makes a big difference at least over the winter!
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