Home Prices Rose 9.5% in November. Will That Continue in 2021?

High demand and low inventory drove home prices up late last year. Will they keep climbing?

Record-low mortgage rates are driving many people to buy homes. But those who have sought to purchase property in the past few months may have had a challenge to deal with -- inflated home prices.

Home prices rose 9.5% in November of 2020 compared to a year prior, according to the S&P CoreLogic Case-Shiller Home Price Indices. That represents the strongest annual gain in over six years, and one of the most substantial annual gains over the past 30 years.

Why the jump in home prices? We can thank low supply and high demand.

Housing inventory has been sluggish since summertime, with many would-be sellers opting to hold off on listing their homes until after the pandemic. And any time there's a situation where a commodity is in short supply, it creates the perfect environment for higher prices.

Of course, at this point, it's a new year and mortgage rates are still holding fairly steady. The question is: Will home prices continue to rise in 2021? Or will things taper off eventually?

A number of variables

In the absence of a crystal ball, it's tough to predict how home prices will trend this year. But here are some key factors that could have an influence:

1. The rollout of the coronavirus vaccine

So far, the U.S. has been slow to distribute vaccine doses to the public. Once more people are eligible to get vaccinated, sellers may more easily get on board with the idea of listing their homes and inviting strangers inside to view them. If that happens, and inventory opens up, home prices will likely start to come down.

2. The state of the economy

Though the Federal Reserve does not control mortgage rates, it does set interest rates, and the two tend to be interrelated. The Fed will likely seek to keep interest rates low to allow the economy to recover. However, if that recovery happens sooner than anticipated, interest rates could come up, and mortgage rates could start to follow suit. That could, in turn, ease up buyer demand, thereby driving home prices downward.

3. The extent to which homeowner protections stay in place

Recently, the federal ban on foreclosures and evictions for struggling homeowners who are delinquent on mortgage payments was extended from Feb. 28 to Mar. 31. But if that moratorium is allowed to run out shortly thereafter, it could result in a wave of foreclosures and short sales. Obviously, that's not a good thing, but it would add inventory to the housing market, thereby helping home prices come down across the board.

What to do if you're planning to buy this year

If you're thinking 2021 is the year you'll finally become a homeowner, you may need to prepare to pay a premium for whatever property you buy. As such, you'll want to take steps to help ensure that you're able to snag the lowest mortgage rate possible to make up for it. You're more likely to get a great rate on your home loan if you have:

• A strong credit score, ideally, in the mid-700s or above
• A low debt-to-income ratio
• A steady job
• A solid down payment -- ideally, at least 20% of your home's purchase price

We don't know how exactly home prices will trend this year. They could rise, decline, or hold steady. Your best bet is to be prepared for all three scenarios if you're looking to buy.