2019 Economic and Housing Forecast

What a year it has been for both the U.S. economy and the national housing market. After several years of above-average economic and home price growth, 2018 marked the start of a slowdown in the residential real estate market. As the year comes to a close, it’s time for me to dust off my crystal ball to see what we can expect in 2019.

The U.S. Economy

Despite the turbulence that the ongoing trade wars with China are causing, I still expect the U.S. economy to have one more year of relatively solid growth before we likely enter a recession in 2020. Yes, it’s the dreaded “R” word, but before you panic, there are some things to bear in mind.

Firstly, any cyclical downturn will not be driven by housing.  Although it is almost impossible to predict exactly what will be the “straw that breaks the camel’s back”, I believe it will likely be caused by one of the following three things: an ongoing trade war, the Federal Reserve raising interest rates too quickly, or excessive corporate debt levels. That said, we still have another year of solid growth ahead of us, so I think it’s more important to focus on 2019 for now.

The U.S. Housing Market

Existing Home Sales

This paper is being written well before the year-end numbers come out, but I expect 2018 home sales will be about 3.5% lower than the prior year. Sales started to slow last spring as we breached affordability limits and more homes came on the market.  In 2019, I anticipate that home sales will rebound modestly and rise by 1.9% to a little over 5.4 million units.

Existing Home Prices

We will likely end 2018 with a median home price of about $260,000 – up 5.4% from 2017.  In 2019 I expect prices to continue rising, but at a slower rate as we move toward a more balanced housing market. I’m forecasting the median home price to increase by 4.4% as rising mortgage rates continue to act as a headwind to home price growth.

New Home Sales

In a somewhat similar manner to existing home sales, new home sales started to slow in the spring of 2018, but the overall trend has been positive since 2011. I expect that to continue in 2019 with sales increasing by 6.9% to 695,000 units – the highest level seen since 2007.

That being said, the level of new construction remains well below the long-term average. Builders continue to struggle with land, labor, and material costs, and this is an issue that is not likely to be solved in 2019. Furthermore, these constraints are forcing developers to primarily build higher-priced homes, which does little to meet the substantial demand by first-time buyers.

Mortgage Rates

In last year’s forecast I suggested that 5% interest rates would be a 2019 story, not a 2018 story. This prediction has proven accurate with the average 30-year conforming rates measured at 4.87% in November, and highly unlikely to breach the 5% barrier before the end of the year.

In 2019, I expect interest rates to continue trending higher, but we may see periods of modest contraction or leveling.  We will likely end the year with the 30-year fixed rate at around 5.7%, which means that 6% interest rates are more apt to be a 2020 story.

I also believe that non-conforming (or jumbo) rates will remain remarkably competitive. Banks appear to be comfortable with the risk and ultimately, the return, that this product offers, so expect jumbo loan yields to track conforming loans quite closely.

Conclusions

There are still voices out there that seem to suggest the housing market is headed for calamity and that another housing bubble is forming, or in some cases, is already deflating.  In all the data that I review, I just don’t see this happening. Credit quality for new mortgage holders remains very high and the median down payment (as a percentage of home price) is at its highest level since 2004.

That is not to say that there aren’t several markets around the country that are overpriced, but just because a market is overvalued, does not mean that a bubble is in place. It simply means that forward price growth in these markets will be lower to allow income levels to rise sufficiently.

Finally, if there is a big story for 2019, I believe it will be the ongoing resurgence of first-time buyers. While these buyers face challenges regarding student debt and the ability to save for a down payment, they are definitely on the comeback and likely to purchase more homes next year than any other buyer demographic.

Originally published on Inman News and the Windermere.com Blog.

Matthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has more than 30 years of professional experience both in the U.S. and U.K.

What Can We Expect From The 2018 Housing Market?

This article was originally written by Windermere Real Estate’s Chief Economist Matthew Gardner on the Windermere.com blog.

It’s the time of the year when I look deep into my crystal ball to see what’s on the horizon for the upcoming year. As we are all aware, 2017 has been a stellar year for housing across the country, but can we expect that to continue in 2018?

Here are my thoughts:

Millennial Home Buyers

Last year, I predicted that the big story for 2017 would be millennial home buyers and it appears I was a little too bullish. To date, first-time buyers have made up 34% of all home purchases this year – still below the 40% that is expected in a normalized market.  Although they are buying, it is not across all regions of the country, but rather in less expensive markets such as North Dakota, Ohio, and Maryland.

For the coming year, I believe the number of millennial buyers will expand further and be one of the biggest influencers in the U.S. housing market. I also believe that they will begin buying in more expensive markets. That’s because millennials are getting older and further into their careers, enabling them to save more money and raise their credit profiles.

Existing Home Sales

As far as existing home sales are concerned, in 2018 we should expect a reasonable increase of 3.7% – or 5.62 million housing units. In many areas, demand will continue to exceed supply, but a slight increase in inventory will help take some heat off the market. Because of this, home prices are likely to rise but by a more modest 4.4%.

New Home Sales

New home sales in 2018 should rise by around 8% to 655,000 units, with prices increasing by 4.1%. While housing starts – and therefore sales – will rise next year, they will still remain well below the long-term average due to escalating land, labor, materials, and regulatory costs. I do hold out hope that home builders will be able to help meet the high demand we’re expecting from first-time buyers, but in many markets it’s very difficult for them to do so due to rising construction costs.

Interest Rates

Interest rates continue to baffle forecasters. The anticipated rise that many of us have been predicting for several years has yet to materialize. As it stands right now, my forecast for 2018 is for interest rates to rise modestly to an average of 4.4% for a conventional 30-year fixed-rate mortgage – still remarkably low when compared to historic averages.

Tax Reform

Something that has the potential to have a major impact on housing are the current proposals relative to tax reform. As I write this, we know that both the House and Senate propose doubling the standard deduction, and the House plans to lower the mortgage interest deduction from $1,000,000 to $500,000. If passed, the mortgage deduction would no longer have value for home owners who would likely opt to take the standard deduction.

If either of the current proposals is adopted into law, the potential reduction in mortgage-related tax savings means the after-tax cost of home ownership will increase for most home owners. Additionally, both the House and Senate bills also end tax benefits for interest on second homes, and this could have a devastating effect in areas with higher concentrations of second homes.

The capping of the deduction for state and local property taxes (SALT) at $10,000 will also negatively impact states with high property taxes, such as California, Connecticut, and New York. Furthermore, proposed changes to the capital gains exemption on profits from the sale of a home (requiring five years of continuous residence as compared to the current two) could impact approximately 750,000 home sellers a year and slow the growth of home ownership.

Something else to consider is that all of the aforementioned changes will only affect new home purchases, which I fear might become a deterrent for current home owners to sell. Given the severe shortage of homes for sale in a number of markets across the country, this could serve to exacerbate an already-persistent problem.

Housing Bubble

I continue to be concerned about housing affordability. Home prices have been rising across much of the country at unsustainable rates, and although I still contend that we are not in “bubble” territory, it does represent a substantial impediment to the long-term health of the housing market. But if home price growth begins to taper, as I predict it will in 2018, that should provide some relief in many markets where there are concerns about a housing bubble.

In summary, along with slowing home price growth, there should be a modest improvement in the number of homes for sale in 2018, and the total home sales will be higher than 2017. First-time buyers will continue to play a substantial role in the nation’s housing market, but their influence may be limited depending on where the government lands on tax reform.

The Gardner Report – Fourth Quarter 2016

Economic Overview

Washington State finished the year on a high with jobs continuing to be added across the market. Additionally, we are seeing decent growth in the area’s smaller markets, which have not benefitted from the same robust growth as the larger metropolitan markets.

Unemployment rates throughout the region continue to drop and the levels in the central Puget Sound region suggest that we are at full employment. In the coming year, I anticipate that we will see substantial income growth as companies look to recruit new talent and keep existing employees happy.

 

Home Sales Activity

  • There were 19,745 home sales during the fourth quarter of 2016—up by a very impressive 13.4% from the same period in 2015, but 18.7% below the total number of sales seen in the third quarter of the year. (This is a function of seasonality and no cause for concern.)
  • Sales in Clallam County grew at the fastest rate over the past 12 months, with home sales up by 47%. There were also impressive sales increases in Grays Harbor and Thurston Counties. Jefferson County had a fairly modest decrease in sales.
  • The number of available listings continues to remain well below historic averages. The total number of homes for sale in the fourth quarter was down by 13.7% compared to the same period a year ago.
  • The key takeaway from this data is that 2017 will continue to be a seller’s market. We should see some improvement in listing activity, but it is highly likely that demand will exceed supply for another year.

 

Home Prices

  • Demand continued to exceed supply in the final three months of 2016 and this caused home prices to continue to rise. In the fourth quarter, average prices rose by 7.1% but were 0.4% higher than the third quarter of the year. The region’s average sales price is now $414,110.
  • In most parts of the region, home prices are well above historic highs and continue to trend upward.
  • When compared to the fourth quarter of 2015, price growth was most pronounced in Kittitas County. In total, there were eight counties where annual price growth exceeded 10%. We saw a drop in sales prices in the notoriously volatile San Juan County.
  • The aggressive home price growth that we’ve experienced in recent years should start to taper in 2017, but prices will continue to increase at rates that are higher than historic averages.

 

Days on Market

  • The average number of days it took to sell a home in the fourth quarter dropped by 15 days when compared to the fourth quarter of 2015.
  • King County was the only area where it took less than a month to sell a home, but all markets saw decent improvement in the time it took to sell a home when compared to a year ago.
  • In the final quarter of the year, it took an average of 64 days to sell a home. This is down from the 78 days it took in the third quarter of 2015, but up from the 52 days it took in the third quarter of 2016. (This is due to seasonality and not a cause for concern.)
  • We may experience a modest increase in the time it takes to sell a home in 2017, but only if there is a rapid increase in listings, which is certainly not a given.

 

Conclusions

This speedometer reflects the state of the region’s housing market using housing inventory, price gains, sales velocities, interest rates, and larger economic factors. For the fourth quarter of 2016, I actually moved the needle a little more in favor of buyers, but this is purely a function of the increase in interest rates that was seen after the election. Higher borrowing costs mean that buyers can afford less, which could ultimately put some modest downward pressure on home prices in 2017. That said, the region will still strongly favor sellers in the coming year.

This article originally appeared on the Windermere.com blog.