Since this post (in July, 2018), existing home sales have mostly moved sideways, and both new home sales and single family starts have hit new cycle highs.
Here is the graph I like to use to track tops and bottoms for housing activity. This is a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.
The arrows point to some of the earlier peaks and troughs for these three measures.
The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.
RI as a percent of GDP has been sluggish recently, mostly due to softness in multi-family residential. However, both single family starts and new home sales have set new cycle highs this year.
Also, look at the relatively low level of RI as a percent of GDP, new home sales and single family starts compared to previous peaks.
To have a significant downturn from these levels would be surprising.
This is a price survey that ranks the over/under for each metro to the 2.8% value growth expected nationwide. I’ll take the over for San Diego!
The Zillow Home Price Expectations Survey sponsored by Zillow and conducted quarterly by Pulsenomics LLC, asks more than 100 economists, investment strategists and real estate experts for their predictions about the U.S. housing market. The Q4 survey also asked panelists to rate their 2020 expectations for home value growth compared to the nation in 25 large markets.
On average, panelists said they expected U.S. home values to grow by 2.8% in 2020. The share of panelists saying they expected a market to outperform that average was weighed against the share saying they expected it to underperform to create a net score.
Of the 14 markets with positive scores, 11 come from Texas or elsewhere in the Southeast or Southwest. The exceptions are Denver, Minneapolis and Portland. Seattle was the most polarizing market, with an even 40% of panelists each expecting it to overperform and underperform.
Of the 10 markets that earned negative scores, meaning more panelists expected them to underperform than overperform, six were in California. A group of expensive markets in the state — San Francisco, San Jose and Los Angeles — are expected to perform the worst. Cincinnati and Sacramento round out the bottom five.
“Having subjected buyers to a crucible of fierce competition for multiple years, many West Coast markets hit an affordability ceiling that set off declining home values in the most expensive of these,” said Skylar Olsen, Zillow’s director of economic research. “Indeed, this price correction — a clap back from having appreciated with too much exuberance in the recent past — pushes many previously hot markets to the bottom of our experts’ list. At the top of the list are metros still providing relative affordability and thriving, amenity-rich communities that appeal to younger adults willing to make a move. These features, plus the ability to grow and add housing in the future, are attractive propositions for employers and employees alike.”
Many panelists expect home values in San Jose and San Francisco to continue falling in 2020, and some expect more markets in California to join them. Sixteen panelists out of the 42 that selected at least one metro said home values will fall in Los Angeles, and twelve said the same about San Diego and Riverside.
Whether you move there or just buy rental properties, these are NAR’s hotspots:
In offering its list, NAR tracked ongoing data including domestic migration, housing affordability for new residents, consistent job growth relative to the national average, population age structure, attractiveness for retirees and home price appreciation.
The 10 markets that made the cut were, in alphabetical order: Charleston, S.C.; Charlotte, N.C.; Colorado Springs, Colo.; Columbus, Ohio; Dallas-Fort Worth; Fort Collins, Colo.; Las Vegas; Ogden, Utah; Raleigh-Durham-Chapel Hill, N.C.; and Tampa-St. Petersburg, Fla.
“Some markets are clearly positioned for exceptional longer term performance due to their relative housing affordability combined with solid local economic expansion,” said NAR’s Chief Economist Lawrence Yun. “Drawing new residents from other states will also further stimulate housing demand in these markets, but this will create upward price pressures as well, especially if demand is not met by increasing supply.”
“Potential buyers in these 10 markets will find conditions especially favorable to purchase a home going into the next decade,” added NAR President Vince Malta, broker at Malta & Co. Inc. in San Francisco. “The dream of owning a home appears even more attainable for those who move to or are currently living in these markets.”
With the housing market stabilizing from the drama of the early years of home price recovery and the subsequent slowdown during 2019’s home shopping season, we have a rare moment of calm to reflect on what housing might look like in the year to come.
If current trends hold, then slower means healthier and smaller means more affordable. Yes, we expect a slower market than we’ve become accustomed to the last few years. But don’t mistake this for a buyer-friendly environment – consumers will continue to absorb available inventory and the market will remain competitive in much of the country.
But while the national story is a confident one, housing in some manufacturing-heavy markets may see adversity. The struggle could be even more stark, since similarly affordable housing markets with a more balanced job profile may be 2020’s rising stars.
There are several 50,000-foot reasons why we expect this gentle downsizing to continue:
Many of today’s younger, millennial home buyers have expressed a preference for denser, more urban homes that are more walkable to shared amenities.
Younger buyers are struggling to afford large homes built in prior decades
Eco-consciousness is also growing broadly.
Today’s older homeowners are expressing a desire for smaller, less maintenance-heavy and more accessible (read: fewer stairs) homes as they age and move into newer homes. In 2019, 56% of new construction home buyers were 40 or older, according to the 2019 Zillow Group Consumer Housing Trends Report.
Home builders are constrained by a shortage of buildable land in desirable areas. Prices on key building materials including lumber and steel are increasingly volatile. And competition for skilled construction labor is fierce, pushing wages up.
Each of these trends points to a continuation of this downsizing of new homes – smaller homes are inherently more dense, walkable and affordable; smaller homes are efficient and eco-friendly; smaller homes require less maintenance and are more accessible; smaller homes enable builders to do more with less.
There will always be demand for large, suburban homes on big lots – but on net, we expect attitudes to shift away from that and toward a lifestyle with a smaller footprint.
Mortgage Rates Will Stay Low, Keeping Housing Demand High
Mortgage rates fell markedly in 2019, and are expected to remain near their current, relatively low levels for the bulk of 2020. Softening GDP growth and investment, continued global weakness due in part to the U.S.-China trade conflict, and below-target inflation will continue to hold rates in check. Barring marked improvements in these indicators, the Fed will have no reason to return to rate hikes.
If low mortgage rates persist, this will keep home purchase demand strong and continue to fuel decent price growth in the nation’s most broadly affordable markets. But low rates won’t be enough to reignite high growth rates in the nation’s highest-priced markets, notably on the West Coast and in the Northeast. In these markets, buyers seem to have hit an affordability ceiling where even low rates can’t bring many homes into the typical first-time buyer’s budget range, especially because low rates don’t help overcome the upfront hurdle of high down payment requirements. In those high-priced markets, buyers will continue to fan out in search of more affordable areas.
Looking ahead at 2020, we think home sales will continue to climb, but slowly. Why?
Although a small fraction of overall sales, new homes sales grew significantly in 2019. That has helped buoy builder confidence and lead to some of the most robust permit and starts numbers in a long time.
If builders in 2020 deliver on their promises to build smaller and at more affordable price points, new construction will continue to be attractive to buyers unable to find a match in the competitive and limited existing home market.
Yes, inventory is tight – but when we say that, we’re really talking about the number of homes available to buy relative to demand from buyers. Sales can remain strong while inventory remains tight – and a sudden jump in the number of sales will result in a corresponding drop in inventory.
What really matters is the flow of homes onto the market – the turnover or velocity of home sales, not months’ supply or overall level of available inventory, that constrains home sales numbers.
And we have reason to believe that turnover among a given segment of homeowners will be made more possible now in a way that it wasn’t before. iBuyer business models, like Zillow Offers, are ultimately about lowering sellers’ transaction costs. Economics 101 says that lowering transaction costs and making transactions themselves easier will mean those transactions will happen more often.
Last year, I guessed that our NSDCC sales would drop 20% due to high mortgage rates, and pricing would stay about the same. Rates dropped instead, and both sales and pricing stayed about the same as the previous year.
In 2020, I think we will see sales drop 10%, just because we’re overdue, and guessing that the NSDCC median sales price might go up 2% to 3%.
We’ve entered the World Of Concierge, where all participants – flippers, ibuyers, and realtors/brokerages – are rehabbing, improving, decorating, and staging most homes for sale. The movement has been building for years, and in 2020 we should see full implementation.
It takes some of the sting out of paying full retail, and buyers really don’t mind paying all the money if they get a turn-key home. Because sellers and agents will be going further to satisfy the retail buyer, we should see more of the softer landing that we saw this year that was caused by dropping rates.
Here’s what Rob Dawg said last year:
Median +4%. Late year inflation and demand for even negative cash flow rental properties. Volume down only 12%. Lots of deck chair shuffling will look like volume. Reported volume -10% from 2018.
$2m+ volume will increase. Lots of quality properties aging out and none of the kids or grandkids can afford to take possession out of the communal estate. Add to this the “too many houses” crowd both casual investors and the very rich who have made their money and ready to throw off the carrying costs.
Almost nothing sub $550k will show up on the sales sheets.
Interest rates will range between 4.4% (early, briefly) and eventually 5.6% (in Q4). Inflation and banking regulations conspire.
There may be a technical recession that will be over before it is confirmed. People will argue whether there was a recession.
Here is a metric we haven’t followed. Total dollar volume of sales will be flat to slightly down.
But what do I know?
We both thoughts rates would be a problem in 2019, but what do we know? It’s hard to believe rates could drop lower in 2020, but if they did get into the low-3s it would ignite the market. Those who have been wanting to move up or down but had a mortgage rate in the mid-3s or higher could now justify moving and getting a lower rate. If California residents pass the referendum to enable seniors to take their old tax basis with them when they buy up in price, it could also ignite sales (if you believe the California Association of Realtors).
What’s Your Guess? The closest guesser will get four tickets to a Padres game!
Mr. and Mrs. Dawg did join us for a Padres game this year (vs. the Red Sox).
Above you can see how our market compares to others, and below is the history of our ‘months of supply’. I said in the video yesterday that I thought the NSDCC sales in 2020 will be down 10% year-over-year mostly because there aren’t enough reasonably-priced homes to sell (or conversely, there aren’t enough buyers who can/will overpay for the multi-million-dollar homes).
I think you can see some of the price resistance lately as the orange line got into the 3s the last two years. We’ve seen how the velocity of the price increases has slowed considerably and when that happens, the natural next step for the market is fewer sales.
The orange line hit 3.0 in April of this year, when the previous April it was only 2.4, which means the inventory grew quicker at the start of the selling season. Expect the same in 2020, and when buyers see a rapidly growing inventory, it’s natural for them to be cautious and picky.
New-home sales probably will jump 11% to 750,000, according to Yun’s new forecast, which would be the highest reading since 2007.
Sales of existing homes likely will increase 3.7% to 5.56 million in 2020, the highest tally since 2017, Yun said.
“Some loosening in inventory will happen in 2020, and so we expect home sales to rise,” Yun said at NAR’s convention in San Francisco. “We’ll see an increase in inventory, but not any oversupply, so home prices should continue to move higher – our hope is in a much tamer fashion.”
Yun said he expects the median price of anexisting home in the U.S. to be $270,400 next year, rising 4.3% from 2019. That would be a slower pace than the 4.9% annual gain in the median price he forecasts for 2019 and the 5.7% recorded for 2018.
The median price for a new home probably will be $313,500, down 4% from 2019, but that could stem from a shift toward smaller houses as builders try to meet demand from first-time buyers.
The average U.S. rate for a 30-year fixed mortgage probably will stay at 3.7% through the second quarter of 2020, Yun said. In 2020’s final two quarters, it likely will rise to 3.8%, he said.
Talk of a U.S.-China trade treaty has caused bond yields to rise in recent weeks, which could influence investors in mortgage securities to demand higher returns. But, Yun said he expects “sub-4” rates to continue through 2020.
Home prices increased on an annual basis by 3.5 percent in October according to CoreLogic’s Home Price Index (HPI). The index rose 0.2 percent from the previous month.
The rate of increase in home prices appears to have stabilized for the moment. After trending higher for several years, the HPI hit a recent peak of 6.62 percent in April 2018, then decelerated to 3.53 percent by the following March. Since then it has moved back and forth over a narrow range, 3.3 to 3.6 percent.
Frank Nothaft, CoreLogic’s chief economist, said “Local home-price growth can deviate widely from the change in our U.S. index. While we saw prices up 3.5 percent nationally last year, home prices also declined in 22 metropolitan areas. Price softness occurred in some high-cost urban areas and in metros with weak employment growth during the past year.”
The CoreLogic HPI Forecast indicates that home prices will increase by 5.4 percent on a year-over-year basis from October 2019 to October 2020. They are expected to increase by 0.2 percent from October to November of this year. The CoreLogic HPI Forecast is a projection of home prices using the CoreLogic HPI and other economic variables.
CoreLogic’s current Market Conditions Indicators (MCI) show 35 of the country’s 100 largest metropolitan areas based on housing stock were overvalued as of October. The MCI analysis categorizes home prices in individual markets as undervalued, at value or overvalued by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals such as disposable income. Those markets where home values are 10 percent higher than those long-term levels are considered overvalued and those 10 percent below are considered undervalued. The MCI placed 27 areas in the undervalued category and 38 at value as of October.
During the second quarter of 2019, CoreLogic, together with RTi Research of Norwalk, Connecticut, surveyed Millennials about their housing sentiments. Three out of four told researchers they are confident they would qualify for a loan with their current financial situation. Still, despite this confidence, more than half of the cohort cites buying a home as a stressful experience, noting spending the majority of their savings as one of the leading stressors.
Last December, I had guessed NSDCC sales would drop by 20% this year, but that was back when mortgage rates were touching 5%. With rates back in the 3s for most of 2019, our sales exceeded my expectations – here are the NSDCC detached-home listings and sales for the first 11 months:
NSDCC Detached-Home Sales, Jan-Nov
Total # of Listings, Jan – Nov
# of Sales, Jan – Nov
Median Sales Price
We’re only 28 sales behind last year, and the late-reporters should pull us up real close to 2018.
This year’s sales AND pricing statistics are virtually identical to last year!
There should be more forecasts coming in the next week, but let’s consider what we have so far.
This in today from realtor.com – they have sales dropping in 2020, and prices flat:
Home sales will drop, the housing shortage could become the worst in U.S. history, and home values will shrink in some cities. That’s the 2020 forecast from realtor.com, which holds one of the largest databases of housing statistics available.
Sales of existing homes will fall 1.8% from 2019, according to the forecast. Home prices will flatten nationally, increasing just 0.8% annually, but prices will fall in a quarter of the 100 largest metropolitan markets, including Chicago, Dallas, Las Vegas, Miami, St. Louis, Detroit and San Francisco.
It is a seemingly contrary assessment, given the current strength of the economy and of homebuyer demand, but the dynamics of this housing market are unlike any other — the result of a housing crash unlike any other.
“Real estate fundamentals remain entangled in a lattice of continuing demand, tight supply and disciplined financial underwriting,” said George Ratiu, senior economist at realtor.com. “Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can’t find.”
They also predict that the San Diego-Carlsbad metro sales will drop by 3.2%, and prices rise +0.2%.
“Low interest rates and a shortage of starter homes will continue to push up prices,” DeFranco said. “This is especially the case for lower price points, since builders have tended to focus on more expensive, higher-profit houses and less on replenishing low inventories of entry-level homes.”
It seems the price growth may continue beyond 2020, too. Data from Arch MI shows the chance of home price declines at a mere 11% for the next two years. There are currently no states or metro markets projected to see prices declines in that period.
I agree with Rich about pricing, and we are too deep into the year for it to change much now. There will be occasional deals, but for the most part, sellers will just wait until spring rather than give it away.
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