“The American labor market is stronger than it’s been in decade! and Americans, particularly young Americans/are increasingly feeling – Confident enough to buy homes”- economist Aaron Terrazas
Forecast 2018: Market to Cool Only Slightly
The resilience of the current housing market is an object of marvel. Single family housing has continued to grow in value since 2012. Even in a growth cycle that’s been slow-moving by historical standards and which has benefitted some parts of the country far more than others, the continued performance of the home market is impressive.
For 2018, the basic takeaway sounds a lot like the forecasts for the last three years or so: Sales activity will grow moderately, home prices will also show some growth, if not as much as last year; and there will be more high-end homes to buy than affordable, starter-type properties.
In short, 2018 promises to be a strong market, if just a little off the boil from last year. Some experts suspect a recession is on the way but probably not for several years. Other experts predict five more years of growth. Even with the chilling prospect of a possible economic slowdown, however, most economists and market observers agree that the current economy is strong.
Economic Snapshot of 2018
One optimistic voice about the 2018 economy is Gord-Collins, a real estate investment firm. “The economy is solid, trade deals look okay, new construction is active and recovering from the floods in Texas and Florida….”
The same observer, however, says that the US economy, however strong, still has room to improve. In the firm’s view, the US economy hasn’t fully recovered from the housing crash of 2007. That means both the economy and the housing market have room to grow.
“As long as jobs are up, interest rates are low, and homes are appreciating we are going to see a high volume of real estate transactions,” according to TheStreet.com, an investment website.
The growth of the housing market, of course, relies on continued economic recovery. The big question: How long can recovery last?
The current recovery, while sluggish, is remarkable for its longevity: at 97 months, it’s the third longest recovery since World War II. “So if the economy can make it to mid-2019 in one piece, its ongoing recovery will be the longest in post-war history,” says reporter Andrew Soergel of US News & World Report.
A sudden increase in oil prices could bring on recession again, warns Forbes writer Conor Sen. He points out each time the US economy hit 5% unemployment, that milestone was followed by a spike in oil prices and recession. On the other hand, the US economy is less energy-intensive than in the past.
Comparing Predictions for 2017 vs. 2018
At the same time, the trend of rising home prices will likely slow: Prices are forecast to grow 3.2% this year vs. 5.5% in 2017, according to the National Association of Realtors (NAR). Even more optimistic is Freddie Mac, the federally chartered mortgage investor, predicts a good year with solid 5% appreciation. CoreLogic, the real estate information company, comes in at 4.7% growth in home prices. All those figures, however, fall short of last year’s numbers.
“Most of the slowing will be felt in the higher-priced segment as more available inventory in this price range and a smaller pool of buyers forces sellers to price [their homes] competitively,” according to realtor.com. “Entry-level homes will continue to see price gains due to the larger number of buyers that can afford them and the limited availability of homes for sale in this price range.”
Some parts of the country are still piping hot. Those moderate national numbers mask the double-digit price increases expected in the nation’s most in-demand home markets. “The top forecast markets show price appreciation in the 10% to 11% range,” says Eric Fox, vice president of statistical and economic modeling at Veros Software Inc. in Seattle, WA.
According to Freddie Mac, the top 10 cities with the greatest expectations for price increases, in percentage terms, are Vallejo, CA; Kennewick, CA; San Francisco, CA; San Jose, CA; San Diego, CA; Stockton, CA; Columbus, OH; Fort Wayne, IN; Sacramento, CA and Detroit, Ml.
Vallejo, a working-class community in the Bay Area, is “a good example of the market because it hints at where the opportunities are and where they aren’t,” according to Gord-Collins. “Prices in nearby San Francisco and Bay Area housing markets are so high that buyers are willing to look to the north in Vallejo for what are ultra-cheap properties. As Vallejo and similar neighborhoods improve, demand here could skyrocket for many years.”
Not all communities are benefitting from rising home prices. Leading Fox’s list of worst performing markets is Kingston, NY with a negative 2.5%fall in home values, followed by Ocean City, NJ (-2.1%), Kilgore, TN (-1.9%) and Atlantic City, NJ and San Angelo, TX (both -1.4%).
A Change in the Inventory Crisis?
Another surprise for 2018 is the possibility of recovering sales inventory. Low inventory has been a chronic problem nationally for the past several years and continues to impact both prices and sales activity. “US home prices are still heating up due to the lack of houses for sale,” according to Gord-Collins.
Yet the inventory problem began to turn around last year and may result this year in a balance between supply and demand, at least in some cities, according to realtor.com: “In August 2017, the U.S. housing market began to see a higher than normal month-over-month deceleration in inventory that has continued. Based on this pattern, realtor.com projects U.S. year-over-year inventory growth to tick up into positive territory by fall 2018, for the first time since 2015.”
“Boston; Detroit; Kansas City, Mo.; Nashville; and Philadelphia are predicted to see inventory recover first. Most of this growth is expected in the mid-to-upper tier price points, which includes U.S. homes priced above $350,000. Recovery for starter homes is expected to take longer because their levels were significantly depleted by first time buyers.”
HOME OWNERSHIP REDUCES INEQUALITY
A willingness to embrace new ideas will go a long way toward easing the constraints of low supply, student debt and weaker affordability that are currently suppressing homeownership…Ownership rates are currently below their peak across the younger age groups, and in cities that have seen sharp prices increases, it’s not a good thing… A higher rate of home- ownership makes sense. It is so important to the financial health of the economy. Homeownership helps households accumulate wealth over time, reduces inequality, increases investment in communities and boosts economic growth.”-Ken Rosen, chairman, Rosen Consulting Group.
Is the Home Market Overvalued?
As home prices continue to rise, both consumers and economists are asking whether the market is becoming over-valued. One definition of overvalue is the price level at which most people are either unable or unwilling to buy, forcing sellers to lower their asking prices.
“At these growth levels, many U.S. regions could become overvalued, home price-wise, which would contribute to the slight decline [in the growth rate] of prices…,” says writer Brian O’Connell of The5treet.com.
In fact, home prices will continue to rise faster than incomes in 2018, predicts a New York City-based brokerage. “Housing will become less affordable, hurting millennials and renters the most.”
High prices also make less expensive cities more attractive than before. Southern cities are expected to beat the national average in home sales growth. Topping those affordable Southern cities is Tulsa, OK; Little Rock, AR; Dallas, TX; and Charlotte, NC.
A Big Jump in Home Building
People who fret about high prices are hoping that new home building will create enough new inventory to meet the demand and help stabilize prices. And in fact, home building is revving up: This year, homebuilders are expected to start work on 984,000 single-family homes vs. 782,000 in 2017, according to Statista, a business-information website.
That’s a big jump in new construction, but possibly not enough to meet the demand, according to some economists. NAR chief economist Lawrence Yun says he expects a 9.4% growth to 950,000 new single-family homes. Although he says the increase will “alleviate some pressure,” Yun points out the predicted increase is still less than the 50-year average of 1.2 million starts.
On the other side of the argument, Forbes columnist Bill Conerly says that a 5% reduction in housing starts would make sense for 2018 and the following year, because fewer households are being formed. It’s unclear whether Conerly’s assumptions fully consider either the persistent inventory problems or the high level of pent-up demand among Millennials, many of whom have postponed home buying for years.
Currently, the number of renters nationally is at its highest point in 30 years. Rents are also growing. Together, those facts suggest a growing number of people may be looking to buy and fewer may be looking to rent.
“Rental prices have moved so high the last several years that it makes sense for people to buy, since mortgage payments are comparable to rent (as) a monthly expense… I think we will see rental prices move lower as inventory grows and demand shrinks,” according to TheStreet.com.
LOW INVENTORY A FACTOR IN HOME PRICES
The lack of inventory has pushed up home prices by 48% from their low point in 2011, while wage growth over the same period has been only 15%…despite improving confidence this year (among) renters that now is a good time to buy a home, the inability for them to do so is causing them to miss out on the significant gains that homeowners have benefited from through rising home values. – Lawrence Yun, Chief Economist, National Association of Realtors.
More Millennials Set to Buy
Although Millennials will continue to face challenges next year with rising interest rates and home prices, they are on track to gain mortgage market share in all price points, due to the sheer size of the generation, according to realtor.com. “Millennials could reach 43% of home buyers taking out a mortgage by the end of 2018, up from an estimated 40% in 2017. With the largest cohort of millennials expected to turn 30 in 2020, their homeownership market share is only expected to increase.”
“Millennials are a driving force in today’s housing market. They already dominate lower price home mortgages and are getting close to overtaking older generations for mid and upper-tier mortgages. While financially secure in general, their debt-to-income ratios have started to increase as they compete for higher priced homes.”
A Hatboro, PA-based broker tells TheStreet.com. some Millennials may be willing to uproot themselves from their urban lifestyles in favor of suburbia. “I’m seeing more younger homeowners fleeing the city life for the quiet suburban life… with family on the horizon, a need for neighborhoods with sidewalks, better schools and fenced-in yards are replacing the nightlife and culture of the city….”
GROWTH TREND SURVIVES FLOODS AND FIRES
It’s been anything but a slow year, with an expanding affordable-housing shortage, cries of a new urban crisis impacting cities, a string of tragic and costly natural disasters, and a new regulatory and tax uncertainty due to proposed policy. But the consensus of real estate experts and analysts surveyed by (Urban Land Institute) views a “sudden drop in altitude” as highly unlikely. Growth trends and an economic tailwind suggest an expansion of the current cycle, amid larger structural shifts in real estate… -Urban Land Institute
Is Now a Good Time to Buy, Sell or Both?
Well, that’s a lot of information.
What does it all mean? Even if experts don’t agree on everything (such is the nature of economics) nearly all agree on the following: In 2018, the home market will maintain much of its current pace, with both prices and sales activity continuing to rise. The economy is strong, unemployment is way down and the demand for homes has not been met. Millennials are maturing and taking an expanding share of the market.
While robust, the housing market also has issues, notably supply: For many reasons, homes have been in short supply for years, and as a result homebuyers often find themselves in bidding wars. This is a one more good reason for working with a Realtor, who can provide knowledgeable guidance in these cases.
The big question: Is it a good time to buy, or sell, or both? Yes, on all three. The market is strong, and a possible recession is generally thought to be years away. Buying a new home makes sense, particularly if you are at a milestone in life—marriage, growing family, a new job, a career change, retirement—that calls for buying your first home or moving into a larger or smaller place to live.
As NAR Lawrence Yun observes: “An overwhelming majority of renters want to own a home in the future…”
Wondering whether you should make a move in the current home market? Call us. We’ll carefully guide you through the process of buying and selling a home.