For real estate, as for many things, 2020 was a strange year. Despite a pandemic, a recession and unemployment that at one time hit 20 million, 6 million homes were sold and the average home price was up 5 percent. There were record low mortgage rates of course, but there’s also the fact that the recession has mainly been concentrated among people with lower-paid jobs – people who rent.
2021 will be a strange year too. With vaccines rolling out, we know the end of the pandemic is in sight, maybe by 2022? But that won’t mean any sort of return to normal, for the economy or for real estate. Here are a few things to consider.
1. Jobs: A lot of jobs are never coming back. Businesses have learned to work with fewer employees as the pandemic super-charged a trend already underway before the recession. Many of the lost jobs are in retail and at restaurants but high-paid computer engineers also are affected. Yes, the economy will eventually create other jobs, but that won’t help people in 2021.
2. Urban Migration: The movement to the big cities will continue. Even though the pandemic showed that many jobs can be done from anywhere, people and businesses still want to be near the infrastructure, the social activities, the access to premium healthcare.
Migration to More Affordable Housing: People will move where the jobs are, and away from expensive housing. For decades, young people moved from the Northeast to Texas and Florida. Recently they’ve been leaving California. With a lot of unemployment, a lot of people will be on the move.
These observations lead me to the following conclusions about real estate in 2021 and beyond.
In the short term there will be strong demand for more rentals, just when the supply has actually gone down. Unemployed renters will expand the lower end of the renter market this year but have financial difficulties. This produces more risk for investors in rental property; they should avoid the lower end and stay as close as possible to the center of the market which is what Local Market Monitor has identified as the rent range. After 2021 the lower-end market will again shrink. Remember that the average renter moves within two years; a lower-end property you buy in 2021 may well sit empty in 2022.
In the long term the market for rentals will continue to expand. The recession has again increased the number of people who can’t afford to buy a home. The surge of home buying in 2020 pushed homeownership to 67 percent, up from 65 percent in 2019, but that’s probably a one-time event; the recession damaged people’s savings as well as their income.
The fact that the surge in home buying only pushed home prices up 5 percent suggests very strongly that price increases in 2021 and 2022 will be modest. This will vary from market to market but there will be few opportunities for flipping properties in price booms. Rehabbing older ones for resale at higher values will be a much better strategy.