Key Calls for 2021 - Capital Economics
US Housing

Key Calls for 2021

US Housing Market Update
Written by Matthew Pointon
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Compared to consensus, we are relatively downbeat on the outlook for home sales this year. Mortgage rates will stay close to record lows, but they will not fall further. Pent-up demand from last spring will soon be exhausted, inventory is at record lows and as the economy reopens demand from those fleeing cities will fall back. Despite that, new home sales will have their best year since 2006 and our view that single-family housing starts will average around 1.2m annualised this year is above most other forecasters.

  • Compared to consensus, we are relatively downbeat on the outlook for home sales this year. Mortgage rates will stay close to record lows, but they will not fall further. Pent-up demand from last spring will soon be exhausted, inventory is at record lows and as the economy reopens demand from those fleeing cities will fall back. Despite that, new home sales will have their best year since 2006 and our view that single-family housing starts will average around 1.2m annualised this year is above most other forecasters.
  • As vaccines are rolled out and lockdowns eased, the economy is set for a strong recovery in 2021. After a contraction of -3.6% in 2020, we expect growth of 5.5% in 2021. But that won’t lead to a rise in Treasury yields or mortgage rates. While inflation is set to increase, the Fed is likely to allow it to rise above its 2% target, in line with its new “average inflation targeting” strategy. We expect the 30-year fixed mortgage rate will stay close to 3% over the year, broadly in the middle of the consensus. (See Chart 1.)
  • However, we doubt that continued low mortgage rates will give much of a boost to home sales this year. Indeed, our view that existing home sales will average 5.75m annualised, and new home sales 825,000 annualised, are both lower than the forecasts from Fannie Mae, the MBA and the NAHB. (See Table 1.)
  • Our below-consensus call for home sales reflects several factors. First, the boost to affordability from lower interest rates is rapidly being eroded by higher house prices, and we do not think mortgage rates will fall further. Second, the recent boom in sales partly reflects pent-up demand from the spring, which will soon have worked itself through. Third, as the economy reopens, the exodus from cities will abate, removing a recent source of home demand. And finally, even if demand holds up, record low inventory will act to limit home sales.
  • But record low inventory is good news for homebuilders. Indeed, despite our below-consensus call for new home sales, we still expect 2021 to be the best year for sales since 2006. We are therefore relatively upbeat about the outlook for single-family housing starts. Our call for starts to average just under 1.2m annualised is at the top of the consensus. Admittedly, builders face headwinds from a shortage of lots, labour and materials. But the number of single-family units authorised but not started is at its highest since 2008, and high unemployment means builders should be able to start training new workers.
  • Our view that home sales will ease next year, and that affordability will become increasingly stretched, means the upward pressure on home values should fall back. That view is shared by most forecasters. But our call that house price growth will slow to 3% y/y by the end of 2021 is slightly lower than the median of a slowdown to 4.4% from the 2020 Q4 Zillow Pulsenomics survey.

Chart 1: 30-Yr Mortgage Rate (%)

Table 1: 2021 Housing Market Forecasts (Year Avg.)

Sources: Refinitiv, F. Mae, MBA, NAHB, C.E.

Sources: F. Mae, MBA, NAHB, C.E., 1Scaled up from SF f’cast 2Q4/Q4


Matthew Pointon, Property Economist, matthew.pointon@capitaleconomics.com