It has been a strange year for the real estate market, which has faced dramatically competing forces. Would-be buyers have been tempted by historically low mortgage rates amid the pandemic-induced recession…only to discover that the inventory of homes for sale has hit historic lows across most of the country, causing median home values to reach record highs in many areas. 

Bottom Line Personal asked real estate senior economist Jeff Tucker to describe the competing forces…what he sees ahead for 2021…and how all this could affect your future plans for buying a home…

The Competing Forces

Some homeowners are shifting from certain big crowded cities—especially cities where quality of life and sense of safety are in decline—to less populous suburbs…or from high-tax states to low-tax states. Various people are seeking homes that will give them more space for home offices, while many homeowners are reluctant to sell and move amid the pandemic, especially if they are happy with the amount of space they have. Decisions about whether to move are becoming less dependent on whether someone is close to work, given the huge shift to remote work…and new mortgage forbearance programs have put off the need to move immediately for homeowners who have lost their jobs and may be under pressure to cut expenses.

Amid all of these competing forces—and in this very competitive seller’s market—some eager buyers are settling for homes that are less than ideal fits and acting with greater speed and less caution than they ordinarily would. The median time from listing to pending sale was down to 16 days in September, half what it was a year ago, and an increasing number of buyers are making offers that don’t depend on the results of an inspection or appraisal, a risky move.

What’s Ahead for 2021

My forecast:Although uncertainty remains, 2021 looks like it could be a much better time to buy a home than 2020, as inventories creep back up and mortgage rates remain appealingly low.

Mortgage rates seem likely to remain very low through 2021. Recently the average rate for a 30-year fixed-rate mortgage was around 3%, a historic low. It’s very likely that rates will remain low through 2021 as the Federal Reserve keeps its benchmark rate near zero to help the economy recover. 

The 2020 recession is unlikely to dramatically undercut home prices the way that the Great Recession of 2007–2009 did. That recession did so because millions of home buyers owned houses that they couldn’t really afford, due to subprime mortgages, and there was a home-building glut. That’s not the case this time—in fact, new home construction has yet to fully recover from levels before that economic crisis.

Although pandemic-caused unemployment is likely to increase the supply of homes on the market next year back to normal levels, it is unlikely to do so sufficiently to lead to falling home prices. One ­reason why: It’s the retail and service sectors that have been hit hardest by pandemic unemployment, and most employees in those sectors are renters, not homeowners. 

Home prices are falling in the most expensive cities. Although inventories of homes for sale are at record lows ­nationwide, they’re up sharply in Manhattan and San Francisco, where would-be sellers outnumber buyers for reasons that include sky-high prices and a sense that quality of life has deteriorated—ranging from rising crime and ­homelessness to shutdowns of cultural and culinary attractions. Homeowners are not fleeing less expensive, less crowded cities in massive numbers despite the pandemic. 

There is reason to believe that some suburbs and small cities near New York City and San ­Francisco could continue to see home values increase as people exit those cities. New Yorkers leaving Manhattan seem to be moving to the Hudson Valley and the Catskills north of the city and to southwestern Connecticut. People moving out of San Francisco end up scattered throughout the Bay area, though some have relocated all the way to Lake Tahoe, Nevada, where they can dodge California’s high housing prices and state taxes but still fly back to the Bay area in a little over an hour. Widespread forest fires—and the challenges of getting affordable homeowner’s insurance in fire-prone regions—could become a complication in California real estate prices. Cities that have seen below-average home-value growth, though not declining value, include Chicago, ­Baltimore and Houston. 

The areas enjoying some of the nation’s fastest home-value appreciation tend to be less expensive cities far from the pricey coasts, including Boise, Phoenix, Memphis, Charlotte, Indianapolis, Milwaukee and Cincinnati. Plenty of people still want an engaging urban lifestyle despite the pandemic—and still need to live where there are jobs despite the increase in working from home. 

Demographic trends suggest five to 10 years of continued strength for home values. The millennial generation now is in its prime home-buying years—Americans tend to buy their first homes when they’re in their early 30s, and more and more millennials, who were born between 1981 and 1996, reach their early 30s every day. That’s crucial because there are a lot of millennials—they outnumber even the baby boomers. 

Meanwhile, many baby boomers are not ready to sell their homes and move into retirement communities—in fact, the pandemic likely convinced lots of them to delay plans they had along those lines. When you take one huge generation that’s ready to buy…another huge generation that isn’t ready to sell…and throw in a decade of slow new-home construction caused by the Great Recession, the result seems clear—demand for homes is likely to be stronger than supply through at least 2025, if not 2030. 

Inventory could rebound in the spring. Forbearance programs currently are capped at 12 months, suggesting that homeowners who remain unemployed might have no choice but to put their homes on the market in spring of 2021. More than 7% of homeowners are estimated currently to be in forbearance programs, so millions of homes could suddenly come on this supply-starved market, along with the seasonal springtime increase in listings, which is likely to occur in 2021 to some extent. That isn’t enough homes to flood the market and tip the supply/demand balance in buyers’ favor, but it should create a more normal inventory of homes for sale. 

What to Do

Wait until spring to buy a home if you have the flexibility to do so. The delay is unlikely to result in dramatically higher mortgage rates, but it could give you a dramatically better inventory of homes from which to choose, let you make your offer contingent on home inspections and appraisals, and skip the bidding wars that are currently breaking out. 

If you prefer to live in a city, other than New York and San Francisco, the data give no reason to believe that an urban home will be a bad investment, despite media reports of urban flight. If you have some flexibility regarding where you live, a smaller, more affordable city not near the coasts could be the better choice.