2021 Real Estate Trends: What Investors Need to Know

by Aly J. Yale

The housing market has been gaining strength in the last few years — particularly during the COVID-19 pandemic. Home values soared, buyer demand jumped, and mortgage rates hit historic lows. And ultimately, it’s made housing one of the few bright spots during an otherwise difficult time.

But the housing market is always in flux, and real estate trends come and go. Throw in that this industry is highly localized, with different conditions in every city, state, and metro area, and you can’t bet on things staying stagnant for long.

Fortunately, understanding the fundamentals of the market can help you stay on top of all these changes. Check out some of those fundamentals below, and scroll down for the most up-to-date real estate trends of the month.

Real estate prices
House prices are influenced by a number of factors, including local buyer demand and the amount of housing supply that’s available for purchase. Generally speaking, high demand and low supply cause housing prices to rise.

Mortgage rates can also play a role since they impact demand. When rates are lower, there tends to be more interest in buying homes. When rates rise, demand might wane a bit.

At the national level, home prices have been rising for some time. As of the end of 2020, the median home price was just under $347,000. Home prices jumped 11% across 2020 alone.

Housing affordability
Affordability isn’t just a result of house prices. Incomes, inflation, and interest rates also play a role. So rising prices? They don’t always mean homes are getting less affordable. If rates are particularly low or incomes are increasing, homebuyers might actually be able to afford more house than they could have previously.

Fortunately, that’s exactly the scenario we’re seeing today. When factoring in rates, income trends, and inflation, consumer house-buying power was actually up 21% by the end of 2020.

Interest rates
Mortgage interest rates play a big role in the housing market, impacting demand, home prices, and affordability. They also fluctuate daily based on a whole slew of factors, including Federal Reserve policy, the bond market, investor interest in mortgage-backed securities, and, of course, inflation.

In early 2021, mortgage rates hovered around all-time lows, according to Freddie Mac. The average rate on a 30-year, fixed-rate mortgage was just 2.74% in January, up from 3.62% the year before and 4.76% a decade prior.

Housing inventory
Housing inventory — or the supply of homes that are currently available for purchase — is another important factor in the housing market, too. When inventory is low and demand is high, it creates a seller’s market. Home prices rise, bidding wars erupt, and sellers have the upper hand in negotiations.

If inventory is high, on the other hand, buyers tend to have the advantage. In a buyer’s market, there are more available listings than there are buyers to purchase them. This slows down price growth and makes the market less competitive overall.

As far as today’s inventory goes, supply has been very low in recent years, and the coronavirus pandemic only worsened things. With sellers leery about having strangers in their homes — not to mention loads of economic uncertainty — the number of for-sale listings plummeted in 2020, at one point reaching its lowest level ever recorded. Listings have since recovered slightly but still remain fairly low. It’s possible widespread vaccinations will help loosen supply constraints and get sellers back on the market, but, of course, only time will tell.

Delinquencies and foreclosures
Mortgage delinquencies and distressed properties like foreclosures and REOs are another part of the market to pay attention to, especially if you’re an investor. Both of these tend to rise in times of economic hardship. (Case in point: During the financial crisis over a decade ago, there were around 3.8 million foreclosures.)

Though the pandemic has certainly caused some economic trouble — not to mention plenty of job loss — the same isn’t occurring this time around. That’s thanks to a variety of foreclosure bans (one from the White House for government-backed properties and another from the Federal Housing Finance Agency for those with Fannie Mae- and Freddie Mac-owned loans). As of early 2021, foreclosures were actually down 80% due to these measures.

Housing market cycles and crashes
Real estate, along with the overall economy, tends to be cyclical. There are booms and busts, and as we saw with the housing crash back in 2007-2008, some of these extremes can get pretty bad.

Fortunately, most experts don’t think we’re nearing another crisis just yet. Though the economy is in a recession, there are a few key differences in today’s housing market versus those of downturns past.

For one, property owners have record levels of equity. Between Q3 2019 and Q3 2020, homeowner equity jumped by $1 trillion, and according to recent data, a mere 3% of properties have negative equity. This equity protects borrowers in the event their homes lose value, giving them a sort of buffer if the market turns.

Lending standards are also stricter than they once were, so homeowners likely have fewer debts and better credit profiles; overall, they’re more financially equipped to handle the mortgages they’ve taken out. On top of all this, there are low interest rates to consider. The Federal Reserve has committed to keeping the federal funds rate around zero until at least 2023. This should keep mortgage rates low and housing demand high for the foreseeable future.

Deidre Woollard discusses new home inventory vs. historic inventory

Now that we have those base market conditions out of the way, let’s look at a few more timely trends we’ve been seeing in the last month or so.

Here’s what’s happening in real estate in July 2021.

1. Housing affordability is dwindling
We all know that home prices have been on a tear in recent months, but until recently, low mortgage rates and strong incomes had done a lot to stave off any real dips in affordability.

Unfortunately, those days have come to an end. According to ATTOM Data Solutions, housing affordability is now below historical averages in 61% of U.S. counties. That’s up from 48% last quarter and the highest share in two years.

A report from title insurer First American found similar declines in housing affordability. According to the company, affordability dropped in 45 of the 50 top markets, with Kansas City, Phoenix, and Tampa seeing the biggest declines.

2. Renter and homeowner protections are getting extended
The pandemic has spurred a slew of renter and property owner protections, including an eviction ban, a foreclosure ban, and widespread mortgage forbearance options. Though many of those were set to expire in June, they once again got extended, giving hard-up property owners, tenants, and mortgage borrowers additional time to get back on their feet.

Landlords got the short end of the stick, of course, and the extension of the CDC’s eviction ban will continue to put a strain on those with nonpaying tenants in tow. Fortunately, the White House has said these extensions were the last of their kind. That means evictions may soon be back on the table — at least in areas without local bans in place.

Additionally, when the foreclosure moratorium lifts at the end of the month, it could mean additional low-cost properties to invest in — and maybe even some downward pressure on home prices.

3. Flipping rates — and profits — are slipping
New data released in June shows a big dip in both home flipping rates and profits. According to ATTOM’s 2021 U.S. Home Flipping Report, flips only accounted for 2.7% of all transactions in the first quarter of the year — the lowest share in over two decades.

What’s worse? Flipping profits dropped, too. The typical gross profit for a flipper was $63,500 last quarter — or a 37.8% ROI on average. That’s down from 41.8% the previous quarter and the lowest ROI since 2011.

“It’s too early to say for sure whether home flippers indeed have gone into an extended holding pattern,” said Todd Teta, chief product officer at ATTOM. “But the first quarter of 2021 certainly marked a notable downturn for the flipping industry, with the big drop in activity suggesting that investors may be worried that prices have simply gone up too high.”

4. Listings are up
The market has been plagued with a supply problem for some time now. Lately, though, there have been faint signs of improvement.

According to Realtor.com, new listings were up 4% year over year in the last week of June. And while total inventory is down 42% over the year, that’s an improvement from the 54% dip seen back in April.

“We have seen more new listings this year compared with 2020 in 11 of the last 13 weeks,” said George Ratiu, senior economist at Realtor.com. “Home inventory remains tight, but there is a clear improvement.”

5. Foreclosures are starting to pick back up
Despite the foreclosure moratoriums that are still ongoing, foreclosures appear to be on the rise. According to ATTOM and RealtyTrac, foreclosure filings are up 23% from a year ago. Actual foreclosure starts are up 36%.

All in all, one in every 12,700 housing units had a foreclosure filing last month. Foreclosure rates were highest in Nevada, Delaware, Illinois, Florida, and New Jersey.

According to Rick Sharga, executive vice president at RealtyTrac, investors can feel encouraged by the latest data, but they shouldn’t celebrate just yet.

“While the increase in foreclosure activity is significant, it’s important to keep these numbers in perspective,” Sharga said. “Last year’s numbers were extraordinarily low due to the implementation of the foreclosure moratorium and the CARES Act mortgage forbearance program, so the year-over-year numbers look a lot more dramatic than they are.”