Prediction: The housing market will continue to cool
Over the first half of 2019, home-price growth will stay slow. Our forecasts have price growth settling around 3 percent, which would be the slowest price growth we’ve seen in years. As recently as the first half of this year, prices were still growing 7 percent, and price growth has reliably exceeded 5% since the start of 2015. There’s quite a bit of uncertainty around our price forecast; there’s a real chance prices could fall below 2018 levels, putting up negative growth for the first time since 2011.
Sellers will have to adjust their price expectations as buyers grapple with rising mortgage rates and already-high home prices. Metros that saw the most price growth in the first half of 2018 will experience the biggest slowdowns in price growth in the first half of 2019. Seattle, San Francisco, San Jose, Portland, San Diego, Los Angeles, Denver, and Honolulu are a few of the metros where we expect demand to cool the most.
On the flip side, we expect home prices to continue to grow at a strong pace in a handful of small, affordable, inland markets like Buffalo, Rochester and Greensboro, where the market is still heating up.
We’re going into 2019 with a 5 percent greater supply of homes for sale than we had going into 2018, which is the highest growth we’ve seen since September 2015, but home sales were down 8 percent since last year in November. A still-growing economy and increased access to credit will support more home buyer demand, but higher interest rates will make home-buying more expensive, so it’s hard to say whether home sales will stay down or rebound next year.
Prediction: Homeownership rates will continue to rise
Whether total home sales go up or down, more homes will be sold to people who plan to live in the home as opposed to investors, which will cause the homeownership rate to rise. In 2019, homebuyers will enjoy more inventory and less competition from speculators and house-flippers, which will lead to more people enjoying the benefits of homeownership. Homeownership has been consistently growing from its post-recession valley of 63 percent in 2016 to above 64 percent this year. We predict the homeownership rate will grow more rapidly in 2019.
Prediction: A cooling housing market will dampen economic growth only slightly
In 2018, economic growth was the strongest it has been since early 2015. However, residential investment, which includes money spent on construction, renovations, and real estate commissions, and typically makes up about 15 to 18 percent of economic activity, declined slightly in 2018. In 2019, the economy will most likely grow, but a cooler housing market will contribute less to the overall economy. Even if residential investment were to fall by 10 percent, which has only happened three times in the last 40 years, total economic activity would be impacted by 1 to 2 percent. That isn’t enough to cause a recession as long as the rest of the economy keeps growing.
There could be some spillovers from the cooldown in the housing market to consumer spending. When homeowners see homes sitting on the market longer and sellers dropping their prices, they feel less wealthy. Rising interest rates will also impact more than just home sales. It will be more expensive to finance a car loan, take on credit card debt, or refinance a mortgage to take out equity, which will also weaken consumer spending.
Prediction: Fewer homes will be built, but more builders will focus on starter homes
In 2019, homebuilders will be more cautious about building during a cooling market and focus on building starter homes that are easier to sell than luxury homes. We have already seen the per-unit value of single-family residential building permits flatten, and we predict per-unit values of building permits will decline in 2019. Another factor in 2019 will be low unemployment, which will finally cause wages to rise for low-income workers. This will impact both the supply of and demand for housing. On the supply side, higher labor costs will limit the number of homes built. Meanwhile, higher wages will be a boon to demand for starter-homes among working-class Americans.
By: Daryl Fairweather
Looking Ahead: Upcoming Key Market Dates
|Thursday, January 3, 2019||Construction Spending|
|Friday, January 4, 2019||Unemployment Rate|
|Friday, January 4, 2019||Nonfarm Payrolls|
*Government shutdown could delay the release of some indicators*
Existing Home Sales Improve for Second MonthAfter a prolonged losing streak – existing home sales hadn’t seen an increase since March – the National Association of Realtors® (NAR) announced a second consecutive uptick in November. Sales of existing single-family homes, townhomes, condos, and co-op apartments were up 1.9 percent during the month to a seasonally adjusted annual rate of 5.32 million units. October sales were at the rate of 5.220, reflecting a 1.4 percent increase from September.
Lawrence Yun, NAR’s chief economist, called the second month of gains a welcome sign for the market. “The market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.”
The inventory of existing homes declined from 1.85 million in October to 1.74 million but increased from 1.67 million available homes in November 2017. Given the uptick in sales, the supply of homes in November is estimated at 3.9 months compared to 4.3 months in October. That is an improvement from a year ago when the supply was estimated at 3.5 months.
Yun said, “A marked shift is occurring in the West region, with much lower sales and very soft price growth. It is also the West region where consumers have expressed the weakest sentiment about home buying, largely due to lack of affordable housing inventory.”
Properties typically stayed on the market for 42 days in November, up from 36 days in October and 40 days a year ago. Forty-three percent of homes sold in November were on the market for less than a month.
“It is not surprising to see homes remain on the market a little longer,” said NAR President John Smaby. “Buyers can often negotiate a more favorable price in those circumstances, especially when paired with a motivated seller and the aid of a Realtor® familiar with their local market.”
First-time buyers were responsible for 33 percent of sales in November, up from last month and a year ago (31 percent and 29 percent, respectively. All-cash sales accounted for 21 percent of transactions in November and investors, who account for many of the cash purchases, bought 13 percent of the homes sold. The share of distressed sales was the lowest since NAR began tracking the metric in 2008, 2 percent.
“Inventory is plentiful on the upper-end, but a mismatch between supply and demand exists at affordable price points,” Yun added. “Therefore, facilitating real estate development of affordable housing units in designated Opportunity Zones can provide better housing access in addition to boosting the local economy.”
By: Jann Swanson