My 2021 Real Estate Predictions

Today I’m going to go out on a limb and do something kind of risky… maybe even stupid. As you may know, I’ve followed the data really closely here in San Antonio and generally in the US. I’ve done a lot of research and feel like I’ve got my finger on the pulse of the market for now, so I’m going to let you all know what I think the near future holds. Of course, you should take this with a grain of salt, as it is just my prediction. If you’d told me last year that we’d be seeing this crazy level of appreciation and a wild sellers’ market right now, I might not have believed you. Yet, here we are. Read on or watch the video for my thoughts.

What I’ve Been Seeing

As I’ve been researching this, I’ve seen a lot of different theories – some totally far-fetched and some pretty reasonable. A lot of people are comparing this market to 2008, and I have to admit there are quite a few similarities. If you’re a realtor or are trying to buy a house, you know that every listing is getting dozens of offers very quickly, often over asking price. It is just a frenzy.

The Data

That feels very much like the lead-up to 2008, and we do have some data to back that up.

• Home prices rose 12% year over year, which is the fastest since 2006.
• The price for previously owned homes have surpassed the price of new homes.
• Our median selling price has reached a record high across the country and in San Antonio.

I used to represent a lot of investors who were interested in buying for cash flow, but now I am getting a lot more interest from investors buying for appreciation. There is some speculation going on in this market with these rapidly rising prices, which is quite similar to the lead-up to 2008.

The Supply Crunch

However, 2021 is very different from 2007. The main reason that I’ve noted is supply (the amount of homes available on the market), which is at an all time low. Here in San Antonio, we have about a 1-month inventory, when typically we have a 6-month inventory. In 2006, there were 3.7 million homes on the market, and in early 2020 there were only 1.5 million homes for sale. There were half as many homes available as there were then. The reason most people suggest for that decline in available homes is new construction. After 2008, so many builders have scaled back how many homes they were producing and have been under-building for over a decade now. This is different from 2008 because there were a lot of spec homes and over-building because the prices just kept going up and up.

Changes in Lending Practices

Lending is different these days than it was back before 2008. Way back then, they were giving loans to people who could not ever repay them. The Dodd-Frank Act really reversed a lot of the bad practices and made lenders more accountable in their underwriting to make sure these loans could be repaid. Lending is much more restrictive now, so people who do have these loans are much more qualified to be able to pay them back.

Additionally, the Fed has kept interest rates low because Real Estate was the one area of the economy that was doing so well during COVID. If the Fed decides to raise rates to curb inflation, we could see a slowdown. There are also the mortgage relief programs during COVID that many homeowners took advantage of. We don’t yet know how many people may not be able to pick back up with their payments after the forbearance ends.

Uptick in Demand

So along with the low supply that we’ve been seeing, there’s also high demand. Millennials are starting to buy more homes, people who have been stuck inside due to COVID are wanting to upgrade homes, and a lot of people are wanting to change locations. This coupled with low supply is a recipe for rising prices.

The Economy

We are seeing a kind of struggle in our economy with high unemployment rates and a slow recover from COVID. The government is also having to give people money to keep them afloat. At the same time, we’ve got this housing boom with rising prices, such that people cannot actually afford houses. The economy is going to have to improve in order for the housing market to remain strong. I think this makes sense, but while a lot of doomsday predictions are calling this evidence of an impending crash, I see this as evidence of a slow decline.

Indicators from the San Antonio Market

This market specifically is very different from the rest of the country. Supply has been low for a while because our population has been expanding so rapidly. One of the main causes of this is migration of people from other states. A lot of people are moving here from California, Washington, and other west coast areas. The housing prices in those areas are so much higher than they are here that buyers can get far more house for their money than they are used to. These folks are able to pay with cash, put up larger down payments, and bid up the prices, which is contributing to the increasing prices we are seeing. This doesn’t look like it will end anytime soon and is kind of double-edged sword. It is making it difficult for San Antonians to purchase homes, but it is creating a very stable homeowner base because they are putting down larger payments or paying with cash and have plenty of equity.

Spillover from Austin is really affecting the Northeast side of San Antonio. Housing prices in Austin have increased so much over the past few years that many cannot afford to live there. I’ve had quite a few people express that they want to live in Northeast San Antonio so that they can either commute to Austin or work remotely for a company based there. Live Oak, Cibolo, Schertz, Selma, and Converse have grown substantially over the past few years.

With these factors, those who are in forbearance who will not be able to make their mortgage payments anymore, likely will not have to go through foreclosures as we saw in 2008. The supply is so low and the demand is so high that they should not have trouble selling. Additionally, they’ll have some equity in their homes due to the recent appreciation. Hopefully, this will alleviate that supply problem a bit.

I am a bit worried about San Antonio though. The median income here is pretty low at $72,000 for a family of 4. That’s only about $50,000 take-home after taxes are taken out. The median priced homes in San Antonio right now is $277,000. The mortgage on that would be more than 1/3 of the average family’s take-home pay. The market is ramping up so much, such that San Antonians are being priced out of their own market. This doesn’t seem like it will cause a crash, but it is definitely something to be concerned about.

My Prediction

So here’s my prediction – again, it is going to be really funny to look back on this if I’m wrong.

I feel that San Antonio is a really strong market. We have so much industry, so much migration and population growth. I think as a long-term investment, San Antonio is strong. I do think that prices have risen so dramatically and so quickly, that it is unsustainable. I think that prices are going to have to plateau at some point and maybe even decrease a little bit before they plateau.

Inflation is up in a lot of sectors (have you had to buy lumber lately?!). With the amount of money that is being printed, it is going to continue to rise. Personally, I am more concerned that inflation will rise than I am about a real estate crash. It is a good time to make sure that you’re not holding a bunch of cash, and instead have that money in assets that can act as a hedge against inflation. My favorite is real estate, but there are other options.

Cashflow investments are almost impossible to find right now, so I’m kind of sitting back and seeing what happens in the local market in the near future. I always recommend that you have a healthy cash reserve for your investments to weather a negative event.

What I look forward to most, in terms of the San Antonio real estate market opportunities is affordable housing. The average rent on single family homes right now is $1587 and the median home price is $277,000. It is becoming difficult for San Antonians to find affordable hosing. People who are working to solve that problem are at the beginning of a great opportunity as more people will be needing that in the near future. If you are someone who can provide that in a lucrative way, I think that’s going to be the key.

That’s all I have for now. I’m looking forward to revisiting this next year to see how wrong or right I was. Let me know what you think in the comments. Do you think San Antonio is the next Austin? Are you worried about inflation? Let me know.