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California home prices to grow more slowly next year, Realtors forecast, but sales may be stronger

Ultra-low mortgage rates and pent-up demand for single-family homes will offset continued economic uncertainty and a supply shortage in 2021, with the net result being a 3.3% increase in California home sales and a modest 1.3% increase in the median price next year versus 2020, according to a California Association of Realtors forecast published Tuesday.

With only a few months left to go, sales this year are expected to be 4.5% lower than last year but prices are likely to be 8.1% higher. Last year at this time, the association predicted that 2020 sales would increase 0.8% and prices would rise 2.5%, but that was before the coronavirus pandemic upended forecasts of all kinds.

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Sales this year were weaker than expected mainly because shelter-in-place orders brought the real estate market to a near standstill for several months starting in March, although sales have since rebounded.

“Prices were a lot stronger (than anticipated) because we were not forecasting mortgage rates to go down to 2.8%,” said Jordan Levine, the association’s deputy chief economist.

Some of this year’s price increase was driven by sales of luxury and second homes. The median is the price at which half of homes sold for more and half for less, and can be influenced by a change in the mix of high- and low-end homes being sold. Robust sales of multimillion-dollar homes are “pumping up the median price,” Levine said. “The stock market came back a lot faster than the labor market. That enabled a quicker recovery at the upper end.”

It’s more evidence that pandemic “really had a disproportionate impact. People in professional services tend to be higher-income individuals and were able to carry on” better than people in lower-paying occupations.

In 2021, “we do expect the market to shift more toward owner-occupant, entry-level homes,” Levine said. That’s why price gains next year will be “a little more muted” than this year.

Rising interest rates could threaten affordability, but the association predicts that 30-year fixed mortgage rates will average 3.1% in 2021, down from 3.2% in 2020 and from 3.9% in 2019, and still low by historical standards.

The association’s forecast covers existing single-family homes, not condos or new construction. It did not break out forecasts for regions within the state, but San Francisco is expected to be the strongest in the state, according to Selma Hepp, deputy chief economist with CoreLogic.

She predicted that between August 2020 and August 2021, the median price of existing, single-family homes and condos will rise 7.8% in San Francisco and San Mateo counties, 6.9% in Santa Clara and San Benito counties, 4.5% in Alameda and Contra Costa counties, 2% in Marin County, 13.2% in Napa County and 0.6% in Sonoma County.

By comparison, she expects prices will be 5% higher throughout California and flat nationwide.

One reason the Bay Area will do better than most is because it has a lower percentage of homes in forbearance and higher average homeowner equity than most places.

Homeowners with government-backed mortgages who have a financial hardship because of the coronavirus can request a forbearance, which allows them to postpone payments, without incurring penalties, for up to 12 months. Next year, as their forbearance period expires, many will be able to work out a modification and keep their homes, but if they can’t, some may be forced to sell and that could put downward pressure on prices.

The more equity they have in their homes, the more options they will have, such as refinancing, Hepp said. The average homeowner equity in San Francisco and San Mateo counties is just over $1 million, she said. The statewide average in the second quarter of this year was $408,000, second only to Hawaii with $450,000 in average homeowner equity. The U.S. average was $185,000.

In September, economists with the UCLA Anderson School of Management said construction of new housing will be an area “of particular strength” in the California economy next year. They predicted “a quick recovery to pre-recession levels, with residential building permits almost back to their 2020 first quarter level by year’s end.”

Jerry Nickelsburg, director of the UCLA Anderson Forecast, said low interest rates, the state’s chronic housing shortage, pent-up demand and “some movement on the regulatory side,” making it easier to build new units, will encourage developers to build. By the fourth quarter of 2022, he expects permit issuance, for rental and owner-occupied housing statewide, will hit 130,000 units on an annualized basis, compared with an estimated 117,400 units at the end of this year and 110,000 units at the end of last year. That increase of about 12,600 units over the next two years includes the replacement of some homes destroyed by wildfires.

“That means an increase in demand for construction workers. That is a bright spot when some of our sectors that are lagging behind,” Nickelsburg said. “It’s not a barn-burner, but it’s a bright spot.”

Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender

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