Welcome to 2021, a year that follows a most unusual year for the citizens of planet Earth. While the medical community has grappled with the ambush by the coronavirus, the real estate market moved ahead, confounding even the most insightful economists across the country.
For those who are hoping to purchase a home in 2021, the global pandemic is only one of the challenging aspects of a real estate market that has been laughing (forget bucking) at conventional wisdom for more than a year. And while buying a home is never a simple task, a housing shortage, and historically low mortgage rates have only made buying real estate more challenging – even in a pandemic that has effectively started a recession throughout the globe.
First, though, before dissecting the current state of home buying for 2021, let’s review the new lending limits for conforming loans that were effective the first day of 2021.
The Conforming Loan Limits as of January 1, 2021
Each year, the FHFA – the Federal Housing Finance Agency, the overseers of Fannie Mae (FNMA), and Freddie Mac (FHLMC), is mandated to adjust the maximum limits conforming mortgages across the board. These revisions are done so that current conforming limits (CCLs) accurately reflect changes to the average price of a home across the United States (See the Housing and Economic Recovery Act (HERA)).
This analysis and final revisions from the FHFA are based on the findings in the FHFA House Price Index report (FHFA HPI), a collection of public house price indices from more than 400 cities across 50 states. The FHFA HPI broadly measures the movement of the prices for one-family homes over time.
According to FHFA’s latest HPI, seasonally adjusted home prices rose, on average, 7.42% when comparing 2019(Q3) to 2020(Q3). So, thanks to another twelve months of home price appreciation, the 2021 maximum conforming loan limit for one-family properties will be raised to $548,250 from 2020’s maximum conforming limit of $510,400. This increase represents the same percentage increase of home prices denoted in the FHFA HPI report.
The Updated 2021 Conforming Loan Limits Based on the Type of Property
It is noted that two, three, and four-family properties have higher conforming limits than their one-family counterparts, as follows:
- One-Family Dwelling – $548,250.
- Two-Family Dwelling – $702,000.
- Three-Family Dwelling – $848,500.
- Four-family Dwelling – $1,054,500.
High-Cost Area Limits
It is noted that for those areas in the nation where the local median home value exceeds the Conforming Loan Limit (CLL) by 115 percent or more, the maximum loan amount for conforming loans will be adjusted to reflect those higher home prices. The HERA guidelines set forth the maximum loan limits for these high-cost areas as a multiple of the area median house value, with the establishment of a ceiling limit equal to 150% of the baseline limit.
Because median home values increased across these high-cost areas last year, the revised ceiling loan limit for one-family properties in most high-cost areas will be $822,375, which is calculated as 150 percent of $548,250. There are special and specific statutory provisions for homes in the states of Alaska and Hawaii (and the U.S. Virgin Islands & Guam), which raises the baseline limit to $822,375 for one-family properties.
The reality is that the maximum conforming loan limits will be higher for the calendar year 2021 in every county but 18 counties (or their equivalent) in the United States.
Advice & Insight for Homebuyers in 2021
The first year of the 2nd decade of the 21st century was unlike any year that the real estate market had been seen before. The real estate market in the year 2020 was defined by:
- Increasing Prices.
- Low Inventory.
- Record low mortgage interest rates, all among and likely caused by the global coronavirus pandemic.
Yet, despite these impactful events that hit the economy, potential buyers shook-off the typically worrisome news and continued to look through rose-colored sunglasses. (This positive outlook had begun during NerdWallet’s 2018 survey.)
Key Findings of the 2021 Home Buyer Report
Despite one’s home buying experience, most homebuyers will need to be strategic if they are going to succeed in the purchase of real estate during these somewhat turbulent and uncertain times. Let’s review some of the more interesting and highlighted results of the home buying survey:
- 11% of the respondents (which translates to approximately 28 million Americans) said they plan to buy real estate in the next year. This number might rise with historically low mortgage interest rates remaining low for now. However, it is interesting to note that 11% of survey respondents said last year they were planning to buy a home in 2020.
- An unusually strong demand (and many homeowners canceling plans to put their home on the market due to the coronavirus pandemic) created a national housing shortage. As a result, home buying became quite challenging and somewhat competitive for those vying to buy a home. In fact, according to NerdWallet’s 2020 Homebuyer’s Survey, active home listings were down approximately 26% when comparing active listings from 2020 against those from 2019.
- Actual listing numbers (from Realtor.com) for these two comparative years are as follows:
- 2020 had 914,000 active listings.
- 2019 had 1,300,000 active listings.
- Actual listing numbers (from Realtor.com) for these two comparative years are as follows:
More than 25 million people intend to purchase property over the next year, with about an equal number of Americans hoping to find their first home to buy in the next five years.
- About 2 in 5 respondents (41%) who had bought real estate in 2020 noted that meeting the home’s maintenance and repair obligations was the source of the tremendous financial stress. They were also concerned regarding how the next two years may unfold economically. In fact, approximately 28% of recent homebuyers specifically cite that their ongoing mortgage payments among the largest of all money stressors when looking at the near future. And about one-quarter of those responding noted that they were concerned about meeting simple household necessities like utilities and groceries over the next two years.
- Approximately 43% of the survey’s respondents had already bought the home they had intended to purchase (or were currently in the home buying process) in 2020. However, 39% of the Americans responding to the Harris Poll had either canceled or postponed their homebuying plans as a result of the pandemic or by the economic effects of the coronavirus pandemic.
Yet, the pandemic has also reinvented how American workers do their jobs. According to the survey, 44% of the respondents have become remote workers at some point since the beginning of the pandemic – around March 1, 2020. The ability to work remotely has prompted many Americans (25%) to consider looking for another property in a different location based on the fact they could now work remotely.
More specifically, potential homebuyers had disclosed these reasons for being unable to buy a home:
- Did not have a large enough down payment – 38%
- Credit Score issues – 32%
- The pandemic – 31%
- Reduced income/low income – 29%
- Low inventory – 25%
- Economy – 20%
- Current debt load – 18%
- Home prices out of reach in the preferred neighborhood – 11%, among others.
What You’ll Need to Buy A Home in 2021
Choosing to buy real estate in 2021 won’t be a cakewalk; however, millions of Americans will successfully manage to be homeowners by year’s end. Most will take advantage of some of these strategic insights:
- Given the insightful statistics provided by NerdWallet’s recent survey findings, buyers should recognize that 2021 will likely be equally competitive as the previous year. As such, homebuyers are advised to prepare for tight bidding when vying to purchase real estate. To be successful, homebuyers must present competitive offers, with a full asking price not always enough to seal the deal.
Pro Tip – Check with your mortgage professional or real estate licensee to determine the current pricing trends for real estate in that area. Note, if real estate consistently brings more than the asking price, a potential homebuyer may need to up their ante to remain competitive in the game.
- In 2020, those borrowers applying for conventional mortgages had, according to Ellie Mae, on average, a credit score of 750 or higher. Potential homebuyers with credit scores that fall a bit short can improve their credit scores by making payments to reduce current credit card debt and to limit the number of applications for new credit until you have bought a home.
- The recent economic instability has prompted mortgage lenders to raise loan application standards for government-backed (V.A. & FHA & FHA) and conventional FNMA & FHLMC) mortgages. Those qualifying borrowers seeking the best interest rates must demonstrate they qualify for these historically low-interest rates by verifying they have a stable, steady income, a robust down payment, excellent credit, and a manageable debt load.
- Collected data regarding the down payment for conventional borrowers during 2020 indicates that borrowers were putting about 20% down when purchasing real estate to increase the chances for loan approval. Note, however, there are low down payment options, but these can be more difficult for which to qualify.
- Homeowners should attempt to maintain a debt-to-income (DTI) ratio of no more than 30%, if at all possible. This debt-to-income ratio measures the percentage of monthly debt compared to a borrower’s monthly income. Concerning DTI ratios, the lower, the better, but note that the average debt-to-income ratio for conventional loans during 2020 was 35%.
Pro Tip – The reality is that securing a mortgage in 2021 will be more difficult than in 2020. Lenders have raised the lending bar across the board with the lowest rates available to those with low debt to income ratios, larger down payments, and strong credit profiles.
The Takeaway
While most borrowers concretize their ‘must-haves’ and ‘wants’ in writing, the year 2021 may make those lists a bit ineffectual due to the unique nature of the current real estate market. With inventory down nearly 30% (when comparing 2020 to 2019), there are no obvious signs that this market characterized by low inventory will change anytime soon.
Because inventory is low, potential homebuyers have fewer homes from which to choose. So, homebuyers who remain finicky – and not flexible, will find it remarkably challenging to find a home to meets their homebuying expectations.
The Bottom Line
For those who have an achievable objective of homeownership – that is, they have taken the time to discern what they want in a home and what they are willing to forego, buying a home in 2021 will likely become a reality. This means being realistic and maintaining a flexible perspective that allows for vital compromises for things like an attached garage, hardwood floors, or the types of fixtures located in the kitchen, to name a few.