There is no reason to feel any kind of misgivings or regret to feel excited about leaving 2020 behind. The year was hard on all of us. And with a vaccine in sight, I say good riddance. However, there is one thing that will carry over to the new year and that is the high home prices that make sellers think they can overprice their homes and challenging inventory keeping buyers frustrated and annoyed. 

"Realtor.com®'s 2021 housing forecast predicts record-high prices will continue rising in 2021, delivering a blow to first-time buyers and those on a budget. Mortgage interest rates, which hit historic lows this year and helped fuel the go-go growth in U.S. housing markets, are also expected to tick up again, making monthly housing payments ever more expensive." 

What do we have to look forward to exactly - especially for us here in Knoxville Tennessee? 

There are definitely some positives - well, positive depending on where you stand. For example, there are likely to not be any double-digit price hikes in 2021,s and in fact we only expect to see a 5.71% price growth overall. Much less than we saw in 2020. 

Additionally, with the hope of a vaccine and so many homeowners that held off selling in the hopes of catching that "big fish" will see signs of a market shift and decide to go ahead and sell. The influx of new listings will help with slowing the market and keeping prices level allowing buyers a chance to actually win an offer and buy a home. 

"We expect affordability to become a bigger challenge. It's going to make [housing] more expensive," says realtor.com Chief Economist Danielle Hale. "[But] home prices will rise slower than this year, on the upper end of what we consider normal price growth."

The forecast anticipates mortgage rates will begin slowly going up toward the last half of 2021, reaching 3.4% by the end of the year. Mortgage rates are currently at an all-time low of just 2.72% for 30-year fixed-rate loans in the week ending Nov. 25, according to Freddie Mac. While a roughly 70 basis point rise isn't dramatic, it will make those monthly mortgage payments even pricier. This has the potential to price out some buyers or force others to purchase cheaper houses in less desirable locations. Luckily for those of you searching in Knoxville "less desirable locations" doesn't mean a whole lot. This is such a great area overall. 

However, even higher prices, and therefore higher required down payments, aren't likely to keep the hordes of determined buyers at bay.

Sales of existing homes (i.e., previously lived in abodes) are projected to increase by 7% in 2021. That's coming as folks stuck inside their homes for months on end are seeking larger residences or ones with different features. Younger millennials are competing with older members of Generation Z for starter homes, and baby boomers are downsizing. Many apartment dwellers are also seeking homes on their own.

Ironically, it's those high prices that are keeping prices from rising even further.

"Home prices can’t outpace income growth indefinitely. The higher prices rise, the harder it is for more buyers to get into the market. That tends to dampen demand," says Hale. That means that with less competition, prices don't have as much room to rise.

The bright spot for buyers is that more homes are likely to become available in the last six months of 2021. That should give folks more options to choose from and take away some of their urgency. With a larger selection, buyers may not be forced to make a decision in mere hours and will have more time to make up their minds.

The inventory bump is expected to be due to a combination of more sellers listing their properties as well as builders completing more abodes. Realtor.com predicts single-family housing starts, which are homes that have begun construction but aren't yet completed, will rise 9%. And it's sorely needed as there was an estimated shortfall of almost 4 million new homes heading into this year.

The new construction, while often more expensive than existing homes, are likely to appeal to move-up buyers looking for larger abodes with the latest amenities. Once those folks purchase these brand-new abodes, they typically list their existing homes, adding more inventory to the market.

"A lot of that new construction is not necessarily targeted at first-time buyers," says Hale. "But we have seen builders shift what they’re building to better reach first-time home buyers."

While 2021 is expected to be another banner year for sellers, most are also buyers. And while they can use their home equity to help finance their new abode, they're still likely to be affected by the inventory shortage and loftier home prices and mortgage rates.

"Sellers are still expected to get top dollar for their home sales," says Hale. "The biggest challenge is finding a new home."

However, if 2020 has taught us anything, it's that everything can change in an instant. If the nation undergoes additional lockdowns due to COVID-19, then fewer homes may go up for sale and the market could slow. If everything goes well with the vaccines being rolled out early, then the housing market could benefit from additional inventory and sales.

Another wildcard is the possibility of sustained economic pain. The country could still fall into a double-dip recession if unemployment remains high and businesses continue to suffer. Most folks need jobs to afford home purchases. If the economy doesn't improve, it could put a dent in the market.

“The value of housing is tied to the economy," says Hale. "As long as the economy continues to rebound, I expect the housing market will do well."

Do you have any other specific questions about the real estate market or the Knoxville economy in 2021? Maybe you're looking to buy or sell? Give me a call today! I help people every day with their real estate goals and I'd love to help you too.