Wondering what income you'll need to buy a median-priced home? See our latest metropolitan area home affordability analysis

Wondering what income you'll need to buy a median-priced home? See our latest metropolitan area home affordability analysis

HSH.com 2021 Outlook Calendar

Forecast ItemHSH.com expectationDiscussion
Mortgage rates 30 FRM peak maybe 3.44%Mortgage rate outlook
Federal funds See you in '22The Fed/Monetary Policy
Mortgage regulations The empire strikes back?Mortgage Regulations
Fannie/Freddie reform Going nowhere, againFannie/Freddie/FHFA
Underwater mortgages End of the "boom" deficitUnderwater conclusion? Yes
Home equity / Cash-out refiPlenty of opportunityRefinancing & home equity
HECM / Reverse Mortgages Trending upward againHECM/Reverse Mortgages
Home Prices +4.5% existing, ~2% newHome price forecast
Existing Home Sales +4% to ~5.68 millionExisting home sales
New Home Sales Up again to ~845,000New home sales
Additional thoughts 2 random additional thoughtsA few odds and ends to consider

Mortgage rate outlook

Will 2021 be the year mortgage rates move up from their historic bottoms? There are some reasons to think this will be the case. Most important is that there is a good chance that the coronavirus will be beaten back, allowing for increasingly normal economic activity in economic sectors such as travel, lodging, entertainment, sports, restaurants and other portions of the economy still severely impacted. This should help lift growth, and rising growth often portends firmer interest rates. As well, the pandemic hard-stop effect on price pressures should also begin to wane, and firming inflation also tends to bring higher market-based rates irrespective of the stance of Federal Reserve policy. At the same time, we'll likely continue to see record levels of debt issuance by the Treasury, and there's no way to know if there will be sufficient investor demand to absorb the flow of bonds, and more supply than demand would pressure rates upward a bit. However, bond and MBS buying by the Fed should provide tempering for any upward pressure on rates, so the upside remains limited.

That's not to say that there's no downside potential for rates. Should the vaccine not prove as effective as testing suggests or other complications arise, or if the most challenged sectors cannot come back up to speed, a soft patch would likely form, and rates could settle a bit. Still, with mortgage rates already at or near historic lows, how much space could they realistically have to decline from here? The relationship the 10-year Treasury and the average offered rate for a conforming 30-year FRM has returned to normal; this "spread compression" has been the reason mortgage rates have declined this fall even as Treasury yields have moved up from pandemic lows. However, unless demand for mortgage credit wanes along with a waning of still-elevated risks of loss (millions are still in payment forbearance as we write this), it's not likely that spreads will shrink further, and that puts a floor on rates (unless Treasury yields suddenly and unexpectedly shrink). With more limited downside than still-tempered upside, we think that the average offered rate for a conforming 30-year FRM are reported by Freddie Mac will run between 2.52% on the low side and 3.44% on the top.

You can track and shop for mortgage rates here.

The Fed / Monetary Policy

The Fed took extraordinary measures to support the economy in 2020, including providing more implicit "forward guidance" with regard to when it might begin to again raise the short-term interest rates it controls. As was the case coming out of the Great Recession, the Fed does not want to surprise financial markets, and will likely use the same playbook as last time to gently tighten monetary policy when is becomes warranted, first by tapering new purchases of bonds while recycling inbound proceeds, then shifting the mix to favor Treasuries over MBS before pausing for a time and then finally lifting short-term rates. This cycle took years last time and will likely take years again, but the unusual nature of the recent recession and rebound -- hard stop, then perhaps an 80% recovery (and perhaps edging toward 100% in 2021) will likely mean this process will be accelerated.

If the economy begins to more fully reopen and normalize as the year progresses, we can see a case where bond buying is slowed in 2021, but at best this seems like a "later in the year" concept right now. While it's risky to use absolutes, we expect that the Fed will be making no changes to the federal funds policy rate in 2021. However, resuming growth, inflation hitting and possibly surpassing its target (even with the Fed's new policy of inflation tolerance) will likely see at least increase discussions among members about laying the groundwork for eventual rate lifts, and we'll probably start to see these reflected in the FOMC's Summary of Economic Projections as the year wends forward. At last look (September) no members expected to be raising short-term rates in 2021, just one thought a hike would be warranted in 2022 and just 5 in 2023. We think this will change, with 2022 and 2023 expectations of a rate increase rising as we go through next year.

For more about the Fed's actions, see our regular updates on Fed policy changes, updated after each Fed meeting.

Mortgage Regulations

A new regime in the White House will likely mean many new heads of the various bureaus and departments that oversee the mortgage and related industries. The lighter regulatory touch of the Trump administration will give way to one arguably more like that seen under President Obama, where a more punitive approach to regulation was common. We may see new heads of the Federal Housing Finance Agency, which oversees Fannie and Freddie and for the Consumer Finance Protection Bureau. It's hard to make sweeping new policies quickly, and so that probably doesn't occur, but a re-strengthening of any regs weakened over the last four years does seem likely, as does a renewed focus on expanding access to credit for underserved communities, scrutinizing payday lenders, increasing minority homeownership, and other similar measures.

We could see federal foreclosure moratoriums extended, and there may be a more formal forbearance-into-modification process instituted to help transition troubled homeowners in industries that cannot yet engage in the economy fully but are expected to over time. It may also be that the federal forbearance program -- currently set to expire at the end of 2020 -- may be re-upped for troubled borrowers for another period of time, until the pandemic is finally quelled. Overall, it will probably not be a year of increased regulation, but rather increased enforcement of existing regulations with some tightening.


Fannie and Freddie have now been in conservatorship for more than 12 years, far longer than was envisioned, and arguably far longer than they needed to be. After little action on housing finance reform during the Obama administration, the Trump administration began to press the enterprises toward a "recap and release" arrangement in hopes of returning them to the private sector. Of late, a capital requirement plan -- essentially, the dollar amount of reserves the twins will need to hold so as not to pose risks to the taxpayer -- was set at $283 billion. Currently, the GSEs hold about $35 billion in capital, and by the present method of retaining profits, it will be a very long time before they reach a point where they would be allowed to become private entities again, unless they were allowed to raise capital by selling stock.

With the change from a Trump to a Biden administration, odds don't favor that a recap-and-release arrangement is going to happen anytime soon, and Fannie and Freddie will continue to be wards of the state. Since the sweep of all profits was ended by the Treasury in September 2019, the GSEs been accumulating earnings and are allowed to hold as much as $45 billion, a number they are now approaching. With a likely a new director at the FHFA and Janet Yellen coming in at Treasury, a new agreement will likely be struck, and capital accumulation by the GSEs will probably be slowed or stopped in favor of using these funds to further affordable or other housing goals.

The FHFA may have a new director before long. The Supreme Court is now reviewing both the structure of the agency and whether or not the government can continue to keep former shareholders of Fannie and Freddie from the profits generated by the enterprises. Earlier this year, the SCOTUS found that the structure of the CFPB -- similar to the FHFA -- was technically unconstitutional but left in place the Bureaus' structure while allowing the president a fire-at-will capability. While not certain, it's likely a similar fate that awaits Dr. Mark Calabria, the current head of the FHFA, but the court may also rule that the structure of the conservatorship allows for the profits to be used in any way the Treasury and FHFA see fit.

Fannie and Freddie are going nowhere, and it may be months until the above-reference case is decided. If the FHFA's structure is deemed constitutional, Dr. Calabria will likely continue on the path toward recap and release, but the goal remains a distant one at present.

We track important changes to regulations, regulators and the GSEs in our weekly MarketTrends newsletter.

Underwater conclusion?

After a robust year for housing in many parts of the country, one might think that the troubles of the long-ago housing boom and bust would be well past. Surprisingly, they aren't, but perhaps the finish line is moving closer.

By our reckoning from FHFA HPI data, 88 percent of the nation's top 100 housing markets have now seen home values fully recover or pass boom-era peaks, up from 79 during the same period a year ago. By the third quarter of 2020, all but one market is within 10 percent of its previous high-water value mark, and we may see all of these remaining markets fully recovered in a another quarter or three. Even for markets that haven't fully recovered all lost value just yet, it's likely that only a small slice of homeowners who purchased at or very near the peak of prices (for most markets, 13 or 14 years ago) haven't yet been made whole by market forces.

But the top 100 markets aren't the entirety of the housing market, and the home-worth-less-than-the-mortgage problem exists (and probably to a greater degree) in smaller cities, towns and rural areas. Depending on your choice of sources, either 3.5 million homes across the nation are currently underwater (Attom Data Solutions), about 6 percent of all mortgaged properties (a half-percentage-point improvement over last year this time), or 1.6 million are, (CoreLogic), representing 3% of all mortgage properties (a decline of 18.3% over year-ago levels). With home values still firming in many areas (and some fairly quickly), we would expect to see improvement here in 2021 regardless of the reporting source or methodology, something probably on the order of another 20% or so reduction.

As property values are often affected by local issues -- population shifts, industry moving out (or in) and more -- it's likely that some number of properties in some communities will be underwater at different times, so the problem may be more intractable in some regions than others. A home bought more recently in an area where a major industry has just vacated may not recover lost value until jobs return, for example, or places affected by natural disasters may also struggle to retain value.

For our own reckoning, we think 2021 is when we'll bid farewell to the remaining 12 major metro area where at least some properties remain with values below boom-era peak levels. Last year at this time, we thought we'd see a 25% reduction from the then 21 remaining markets -- an improvement of perhaps 6 markets -- but home values increased so strongly as to wipe out 43% of those that remained, and we'll only need about another 13% reduction to close it out.

Interested in the metros with the strongest and weakest home price recoveries or just want check a market's performance over a given time period?

Home Equity / Cash-out refinancing

Surging home prices are creating home equity at a very fast clip for homeowners across the country. CoreLogic estimates that home equity stakes rose by 10.8% over the last year, a full $1 trillion dollars worth, and "tappable equity" is currently north of $6.5 trillion. Despite this, originations and outstanding balances of traditional equity loans and lines of credit continue to sag due to still-firm underwriting conditions. interest rates that are high relative to first mortgages, and less-favorable tax treatment of interest for these products. HELOC balances are now about half the size of a 2009 peak, according to the Federal Reserve, and it appears that few lenders are aggressively marketing HELOCs at the moment.

But cash-out refinances continue to grow. According to Black Knight's Mortgage Monitor for October, cash-out refinances made up 27% of all of refis, with an average equity draw of $51,000 in the third quarter of 2020. By their data, total requests for draws of equity are the highest they have been since early 2009.

With mortgage rates at rock-bottom lows and rising home prices building equity, odd favor a continuation (or even acceleration) of the current trends, where HELOCs balances continue to be slowly paid down, while cash-out refinance activity remains strong. Among other uses, at least some cash-out refinance proceeds are used to retire outstanding HELOCs that are no longer needed, for example, so this would contribute to the trend.<

At some point (but probably not in 2021) borrowers looking to tap built equity will face a new choice: Replace a first mortgage at what is likely a near record-low interest rate with one at a higher rate just to access built-up equity, or take an even higher-interest-rate HELOC to accomplish the same thing? Despite the disparity in price, when this choice does come, the pendulum will start to swing back to HELOCs, with their less-costly and intensive origination process, greater flexibility and other features. For 2021, call it a decline in HELOCs for another year, but probably another significant boost in cash-out refis.

How much equity might you have in your home today... or in the future? Try our Home Equity Calculator and Projector.

Reverse Mortgages

Originations of FHA-backed HECMs rebounded a bit in 2020, just a year after touching record lows. Over the last 12 months, about 42,000 new HECMs were originated, up 34% from 2019, when only about 31,000 were made. Even as HECM originations are only about one-third of the peak levels attained in 2009, there are likely a number of reasons for the burst of activity. Certainly, demographic trends continue to be favorable; a majority of the so-called "baby boomers" are now in the post-62 age requirement to be able to take a HECM. FHA reports show that the average age of someone who takes out an HECM is just over 73 years, and with those born in 1946 (the first year of the boom) now aged 74, there's likely to be an upturn in originations coming.

As well, the millions of job losses due to the pandemic this year have likely accelerated the retirement plans of those post-62 who were formerly working up to the pandemic shutdown, as finding new work may be challenging at best. Of course, it also doesn't hurt that home prices have risen strongly this year; this has created a larger, more valuable pool of funds available to potential borrowers.

As is the case with first mortgage loans, homeowners are also taking advantage of low interest rates to refinance older HECMs, too, which can allow a homeowner to access new funds created by price increases. In addition, and even though there are no payments due today on money borrowed using a HECM, a lower interest rate means a lower pace of equity depletion, possibly helping to preserve an equity stake for the eventual inheritants or sellers of the property to use as needed.

HUD tightened rules for HECMs a few years back as the program was severely straining the Mutual Mortgage Insurance Fund (MMIF). Despite the fund being increasingly in the black in the last couple of years, don't expect the FHA to ease standards for HECMs or cut MIP costs for forward-mortgage borrowers. "The financial performance of the HECM portfolio continues to be a financial drag on the forward portfolio, whose positive performance in effect "subsidizes" the reverse book of loans," said the FHA in their 2020 annual report. The negative impact at the moment is small; a year ago, HECMs were undercapitalized in the MMIF by 18.83%, but even as the gap has closed to a current -0.78%, the FHA remains cautious and wary of future losses.

We may not see another 34% increase in year-over-year originations for HECMs, but we will probably see a good 20% increase or so, goosed again by refinancing of older HECMs. This would lift levels of newly-originated HECMs back to levels often seen before HUD tightened up the program.

You can learn more about reverse mortgages and see average reverse mortgage/HECM rates.

Home prices

Existing home prices have been on a tear in 2020, reaching new record highs, and as of November, the National Association of Realtors recorded an eye-popping 14.6% year-over-year increase in the median sales price. The average monthly change so far in 2020 has been in excess of 9 percent, far outstripping both overall inflation and income growth.

Mortgage rates falling to record low levels has allowed for this to happen. By way of comparison, financed with a 20% down, 30-year FRM (and factoring for expected tax and insurance costs), October 2019's $271,100 median price would have carried 3.69% rate and a monthly PITI payment of $1,337.23; this October's $313,000 median-priced home financed with a 2.83% 30-year FRM would have cost $1,373.07, less than $40 per month more even with a difference in loan amount of more than $40,000. Of course, the higher home price this year means that a 20% down payment would require another $8,000 towards a down payment, so potential homebuyers would have needed to have banked more bucks before jumping in.

But mortgage rates have largely stopped falling, and even if they do drift lower for a time in 2021, there's no reason to expect a repeat of the nearly full percentage point decline in rates seen over the last 12 months. Without falling rates to provide an offset to rising prices, affordability is crimped further, home sales are tempered, and so are home price gains.

Tight supplies of homes for sale have of course allowed prices to leap, and while supplies will continue to be tight, it seems unlikely that skyrocketing prices can continue without the beneficial effect of falling rates keeping monthly carry costs manageable.

Gains in existing home prices will continue in 2021, but should fall back to earth, or at least something approximating "normal". We think that home prices will increase by perhaps 4.5% over the next year, a still-healthy clip, if about half of this year's outsized gain.

Prices for newly-constructed homes will also continue to tick up, largely due to material and labor cost issues. Prices for new homes have actually been relatively stable, with October 2020's median price just 0.1% above October 2019 levels. With existing home prices coming up fast, potential homebuyers in the existing market who can't find what they want at a price they want to pay may consider new construction instead -- at present costs, the jump in monthly payment to a new home from and existing one is only about another $53 per month. That said, we wouldn't expect to see more than a 2% increase for new home prices in 2021.

You can reckon what's happened to the value of your home since you've owned it using our MyHPI tool.

Existing home sales

Looking at annualized rate for existing home sales as we close 2020, it would be easy to assume that sales are running hot. After all, the current monthly rate (October 2020) on a annualized basis comes out to 6.85 million sales on a seasonally-adjusted, annualized rate, easily the best since the boom years of more than a decade ago. But extrapolating one number over a year's time doesn't reveal a clear picture either looking forward or behind, especially a picture created in a year so distorted by the pandemic.

Working from the numbers of sales so far in 2020 (10 months of data), we see an average monthly running rate of 445,417 sales of existing homes each month, which would produce actual existing home sales of approximately 5.465 million for 2020 in total if extended over the two months of data yet to come. This smoothed out number puts sales for this year at just about the same pace as last year; when in all of 2019, sales were about 5.34 million, so "booming" sales this year may end up with a more modest actual gain of 2.5% or so over 2019 totals.

For 2021, some of the tailwinds that were already lifting sales of existing homes -- falling mortgage rates, positive demographic trends as millennials come into prime homebuying years and (until the pandemic) a record long economic expansion -- all will continue to enhance demand for homes. That said, there are some headwinds for sales, too, not the least of which is record-thin inventories of homes available to buy, record-high home prices and affordability diminishment. To the extent that they have enhanced sales of late, the distorting effects of the COVID-19 outbreak will also begin to wane, with fewer folks working from home over time and less out-migration from urban areas to suburban and exurban locations.

All in all, it should be a very solid year for home sales, but the current hot monthly rate isn't sustainable. Favorable trends are starting to be met with tempering headwinds mentioned in this Outlook, and that will moderate sales to a degree. We think that existing home sales for the year will improve on 2020 levels, but probably not by more than another 4% over this year's final tally (not known until February), so we'll call it about 5.68 million homes sold in 2021 when all is said and done.

Wondering how much home your income and debts will allow you to buy? HSH's Home Affordability Calculator can help you get a handle on your home purchasing power.

New home sales

A long-awaited surge in homebuilding and sales of newly-constructed homes finally arrived in 2020, and the prospects for a very strong year for new home sales seems on tap for 2021. Consider that annualized new home sales were perking along at about a 774,000 rate last January, but by October were running at 999,000 -- a 29% increase in just 10 months' time. It seems likely that at least some future demand for new houses was pulled into 2020, so we probably won't see anything near a 30% increase in the coming year.

In the same manner as we did with Existing Home Sales above, we smoothed out the run rate for sales, incorporating both the soft pandemic shutdown stretch and the post-opening, pent-up-demand-fueled last half of the year. Using the average monthly sales number over the last 10 months of available data, this puts 2020 at a running rate for perhaps 801,000 or so actual sales, which would represent a 17% increase over 2019, so this past year was a very strong one, indeed.

However, as with existing home sales, it's unlikely that we'll see as a large a kick in sales of new homes for 2021 as we did in '20, but we should see an uptick in sales on the order of 5-6% to a total of around 845,000 units sold when all is tallied for the year in late January 2022.

Additional thoughts

As goes COVID-19 -- waxing now and then soon hopefully waning, for good -- in 2021, so will go the economy. If all goes well, we should see decreasing levels of infection and rising vaccination and immunity by the time spring rolls around, and the advent of warmer weather de-concentrating us humans from one another should also help quell the outbreak. If so, the stage may be set for a surge of economic activity -- or at least a building wave -- by the time summer hits, when cooped-up-at-home pent-up demand should be loosed across the hungry travel, hospitality and entertainment industries. Whether this happens or not will depend on how quickly and widely vaccinations happen, how effective they are across a range of populations and if industries so battered by the pandemic's effects can effectively re-open. That's still unclear, but as we write this, the Congress seems to have finally agreed (for better or worse) on a new stimulus package to tide us over until then, so fingers crossed for the millions of small businesses still bearing the brunt of the social engineering employed to stall the spread of infection.

After a tumultuous 2020, pandemic, recession, civil unrest, the contentious election and plenty more, let's all hope for a healthier, prosperous, calmer 2021, and one where we can find greater appreciation for those around us, even if they hold different views.

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