Tuesday, December 29, 2020

Question #8 for 2021: What will happen with house prices in 2021?

by Calculated Risk on 12/29/2020 11:13:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2021. I'm adding some thoughts, and maybe some predictions for each question.

8) House Prices: It appears house prices - as measured by the national repeat sales index (Case-Shiller, CoreLogic) - will be up around 8% to 9% in 2020.  What will happen with house prices in 2021?

The following graph shows the year-over-year change through October 2020, in the seasonally adjusted Case-Shiller Composite 10, Composite 20 and National indices (the Composite 20 was started in January 2000).

Case-Shiller House Prices Indices Click on graph for larger image.

The Composite 10 SA is up 7.5% compared to October 2019.  The Composite 20 SA is up 7.9% year-over-year.

The National index SA is up 8.4% year-over-year.  Other house price indexes have indicated similar gains (see table below).

The YoY price increases in 2020 were the strongest since 2013.

Although I mostly use Case-Shiller, I also follow several other price indexes. The following table shows the year-over-year change for several house prices indexes.

Year-over-year Change for Various House Price Indexes
IndexThrough Increase
Case-Shiller Comp 20October7.9%
Case-Shiller NationalOctober8.4%
CoreLogicOctober7.3%
FHFA House Price IndexOctober10.2%

There are a wide range of price forecasts for 2021, from around 2% YoY growth to as much as 10%.

Here was Zillow's comment today on Case-Shiller:
"Record low mortgage rates, a wave of households aging into homeownership and a limited number of homes for sale all combined to stoke competition for houses and placed consistent upward pressure on prices for the better part of the last calendar year. These factors appear likely to remain in place in the near term, and an incrementally improving economy should encourage more buyers to enter the market. Taken together, this torrid pace of home price appreciation appears primed to continue well into 2021."
Inventories will probably increase, especially in the 2nd half of 2021, but will most likely still be somewhat low historically.   Also, prices tend to have momentum, so unless mortgage rates increase sharply (unlikely) or inventories rise quicker than expected, we should expect further price increases in 2021.   Watching inventory will be important to adjust this forecast!

My guess (based on my inventory forecast and a recovering economy) is that year-over-year price increases will probably be the strongest early in the year, and then soften somewhat towards the end of 2021.  It seems likely that price appreciation will decrease from the 2020 pace, but still be in the mid-single digit range in 2021.

Here are the Ten Economic Questions for 2021 and a few predictions:

Question #1 for 2021: How much will the economy grow in 2021?
Question #2 for 2021: Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish?
Question #3 for 2021: What will the unemployment rate be in December 2021?
Question #4 for 2021: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020) , or will it will only partially recover in 2021?
Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?
Question #6 for 2021: Will the Fed raise rates in 2021? What about the asset purchase program?
Question #7 for 2021: How much will RI increase in 2021? How about housing starts and new home sales in 2021?
Question #8 for 2021: What will happen with house prices in 2021?
Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?
Question #10 for 2021: How much damage did the pandemic do to certain sectors?