At the beginning of 2020, local markets across the state were bustling with activity and competition. Home prices were rising across the board, with only a few exceptions. It looked like it was going to be another solid year for the California real estate market.
And then the coronavirus came along. In April of last year, home sales plummeted as the state went into a pandemic-driven lockdown mode. Buyers stopped shopping, and many sellers pulled their homes off the market. The housing market essentially ground to a halt.
But then a funny thing happened. Home buyers started to come out again. Sales activity picked up. The real estate and mortgage industries learned to adapt, by implementing digital workflows that eliminated the need for face-to-face contact.
In other words, the market rebounded. Keep this turnaround in mind as we explore the five predictions for the California real estate market below.
Real Estate Market Shows Resilience
Speaking of a turnaround, consider this. In July, the California Association of Realtors (C.A.R.) reported that home sales across the state rose by a whopping 42% from May to June 2020. That’s partly due to state’s gradual reopening, which occurred at that time.
We will probably see another drop in home sales going forward, related to the economic rollback that started in mid-July. But that sharp increase in home sales tells us a lot about the level of demand within the market. Buyers still want to buy, Coronavirus be damned.
The forecast for California’s housing market in 2021 is relatively favorable, given the circumstances. Things could be worse than they are, given the seriousness of the public-health crisis. In fact, the nation’s real estate market is often referred to as the one “bright spot” in the economy right now, as we approach the fall of 2020.
As Frank Martell, CEO of the housing analytics company CoreLogic, recently stated: “Given the economic outlook, housing remains a bright spot for the foreseeable future.”
With that introduction out of the way, let’s look at five predictions for the California real estate market in 2021.
Five Predictions for the California Housing Market
A rebound in home prices. A shift in demand from urban to suburban areas. A gradual rise in inventory levels. A continuation of super low mortgage rates. Those are some of the things we expect to see in the California housing market during 2021.
1. A gradual rebound in home prices.
When this article was published, in early August 2020, home prices in most parts of California were still rising year-over-year. In August, Zillow reported that the statewide median home value had “gone up 4.4% over the past year.”
Through the rest of 2020, we expect that house values could slow down or even level off in some housing markets. Parts of the San Francisco Bay Area could see a modest decline in prices, through the end of this year. In fact, they’re already dropping (year one year) in a handful of cities.
But going into 2021, we expect home-price appreciation to pick up again.
Buyers and sellers are beginning to realize that real estate deals can still be conducted, despite the coronavirus pandemic. State officials have deemed real estate and closing companies “essential” business, due to their role in supporting the state’s infrastructure. So you can still go out and buy a house. And based on those sales stats from earlier, there are plenty of people who want to do that.
The advent of a coronavirus vaccine will also play into this prediction for the California real estate market.
If a vaccine goes into widespread production toward the end of this year, or in early 2021, it would give California residents a huge confidence boost. It would also bring more people into the housing market, increasing demand and home prices going forward.
2. A shift in demand from urban to suburban markets.
Our second prediction for the California real estate market in 2021 has to do with a shift in demand among home buyers. Actually, it’s not much of a prediction. It’s already occurring.
Back in April, the national real estate brokerage Redfin reported that more and more home buyers were looking at suburban and rural areas, as opposed to crowded urban areas:
“Small towns and rural areas may be set to boom in the wake of the coronavirus outbreak (COVID-19). Homebuyer interest in these less-populous areas surged in March as the coronavirus became a national emergency.” -Redfin report, April 2, 2020
“Urban flight” has been in the news a lot lately.
In June, National Association of Realtors chief economist Lawrence Yun predicted that “people will be much more cautious about living in high-density areas with so many people nearby.”
In July, Navy Federal Credit Union economist Robert Frick stated: “The numbers also verify that many people are leaving, or planning to leave, big cities as telecommuting becomes the norm for many businesses.”
It’s easy to understand the motivation behind this trend. The coronavirus pandemic has basically put a premium on space. It’s hard to practice social distancing when you live in a crowded city center.
As a result of all this, we expect that suburban and “small town” housing markets across the state will see an increase in demand and competition in 2021.
This prediction for the California real estate market has been echoed by a number of analysts and economists. So we can’t claim it as our own. Still, it’s a key housing market trend to watch out for in 2021.
3. A gradual rise in inventory levels.
Our third prediction for the California housing market in 2021 should come as welcomed news to home buyers.
Currently, many cities across the state are experiencing a shortage of homes for sale. There just aren’t enough properties on the market to meet the demand from buyers.
In July, C.A.R. wrote: “Housing supply continued to decline significantly across the state, with all areas falling more than 30 percent in active listings from last year.” Southern California, in particular, has experienced a major drop in supply.
Throughout the coronavirus pandemic — and especially in the early stages of it — a lot of sellers began to take their homes off the market due to fears of contagion. But that trend has eased a bit.
A C.A.R. poll conducted in July found that 44% of consumers thought it was a good time to sell, up from 40% a month earlier. So there appears to be a gradual shift in mindset taking place here.
Homeowners who want to sell are starting to realize that it’s reasonably safe to do so, with some common-sense precautions. So we could see a gradual increase in for-sale inventory through the end of 2020 and into 2021.
4. Mortgage rates hovering between 3% and 3.5%.
Here’s another housing market prediction that should please home buyers across California. Mortgage rates are expected to stay within their current low range for the foreseeable future.
Recent forecasts from industry groups like Freddie Mac and the Mortgage Bankers Association have predicted that the average rate for a 30-year fixed mortgage could stay within the low-3% range well into 2021.
Chart: Average rate for 30-year fixed mortgage. | Source: Freddie Mac.
During the week of July 16, 2020, 30-year mortgage rates dropped to an all-time record low of 2.98%. You can see that in the chart above, provided by Freddie Mac. That was the lowest average in 50 years of tracking, and it could fall even lower by the time you read this article.
Back in June, Freddie Mac’s research team wrote: “Going forward, we forecast the 30-year fixed-rate mortgage to remain low, falling to a yearly average of 3.4% in 2020 and 3.2% in 2021.”
This forecast relates back to some of the other California housing market predictions above. Low rates have increased demand among home buyers, which in turn could help prop up home prices going into 2021.
5. An eventual and gradual increase in home sales.
When Governor Newsom began to ease COVID-related restrictions back in June, we saw a huge uptick in home sales across the state. We expect to see another gradual reopening process later this year, which in turn could lead to another surge in home sales.
But this will be a regional trend, and it could be heavily influenced by the urban-to-suburban migration pattern mentioned earlier.
For example, recent reports show that many home buyers are leaving the San Francisco Bay Area for places like Sacramento. Through this year and into next, we could see a corresponding decline of Bay Area home sales and an increase within the Sacramento area.
The Inland Empire (Riverside and San Bernardino counties) is another housing market that could see a rise in demand and home sales going into 2021, as buyers relocate in from the more crowded and pricier coastal markets.
The key takeaway here is that the housing market continues to surprise economists and analysts. It has been referred to, repeatedly, as the one “bright spot” in the nation’s economy. We expected this surprisingly strong performance to continue through the end of 2020 and into 2021.
Disclaimer: This article includes forecasts for the California real estate market in 2020 and 2021. Housing and economic predictions are the equivalent of an educated guess based on current trends and conditions. They are not meant to be definitive. The Home Buying Institute makes no claims or assertions about future real estate market trends in California or elsewhere.