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).
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.
The inventory ‘shortage’ is limited to the lower-end. If you can spend more than a million, there are 785 choices today, which accounts for 92% of the houses for sale between La Jolla and Carlsbad.
How the mix has changed:
NSDCC Total Number of Listings Between Jan 1 – Sept 30:
# of Listings Under $1M
# of Listings Over $1M
% over $1M
As rates head back towards 4% and more and more homes list for more than a million, expect increased sluggishness next year as affordability continues to diminish. Unless, or course, you are Lawrence Yun:
Thanks to strengthening in consumer spending and growing policy clarity at the end of 2010, the economy is finally poised to accelerate and sustain above-par, less volatile growth, according to the January 2011 Economic Outlook released by Fannie Mae’s Economics & Mortgage Market Analysis Group. The economy is expected to grow by 3.6% in 2011, compared to an estimated 2.8% in 2010. The group expects some increase in housing activity during 2011, however, a growth-oriented view of housing is not expected until 2012.
“The economy has regained momentum entering 2011 and we see significant improvement in the economy’s ability to grow compared to 2010,” said Fannie Mae Chief Economist Doug Duncan. “We expect a small rise in home sales this year, but significant amounts of supply and shadow inventory of expected foreclosures will continue to hamper a robust housing picture for some time.”
After controlling for age, income, wealth and a number of other factors, regression analysis indicates that married couples are 2.5 times more likely to own than other respondents.
Having children is cited as a major reason to buy a home by approximately three quarters (76 percent) of all households.
The immigrant population in the U.S. is projected to grow by nearly 130 million people over the next 40 years, according to the U.S. Census Bureau.
Sixty-six percent of respondents say they believe that housing is a safe investment – as safe as a savings or money market account.
More than half say they believe that owning is a good idea, even if they plan to stay in the home less than three years.
Eighty-six percent identify tax benefits as a reason to buy, even though tax benefits are small or non-existent for many homeowners.
The substantial majority of homeowners (89 percent), as well as nearly half of renters (44 percent), believe they would be better off owning their homes, given their current financial situations.
The housing crisis has had the greatest impact on younger Americans. Since the housing crisis, homeownership for those 25 to 29 years old has declined 10 percent since peak rates, compared with a decline of 5 percent among those 35 to 44 and less for those 45 and older.
“Our research helps us better understand the views of homeowners and renters across specific demographics, ethnicities, and regions so that we can provide the best support possible for the market.” – Doug Duncan
Vice President and Chief Economist
Clear Capital released its monthly Home Data Index™ (HDI) Market Report, reporting a year-over-year national price change in 2010 of -4.1 percent, and expects another -3.7 percent year-over-year change in 2011.
The HDI Market Report provides the most current (through December 2010) and granular analysis of how local markets performed compared to the national trend in home prices, as well as a 12-month forecast of what to expect in 2011.
“In terms of home prices, this past year has certainly been characterized by uncertainty,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “Tax incentives and high levels of distressed sale activity had counter effects on home prices which contributed to the fragility of the markets.”
“Some housing markets are well on their way to recovery, while others are experiencing a renewed downturn reminiscent of the housing crash only two years ago,” added Dr. Villacorta. “Understanding which path a given market is likely to follow is dependent on several key factors, but the two clear drivers are local unemployment rates and the prevalence of distressed homes.”
Clear Capital Home Data Index: National Home Price Trends
(Jan. 2006 – Dec. 2011 Forecast)
National home prices in 2010 posted a -4.1 percent year-over-year price change, after a very turbulent year where prices increased 9.7 percent over a 21 week span (late March to mid August), only to be followed by a -9.4 percent price change over the following 19 weeks (September to December). Click for larger image:
In 2011, national and regional metrics will still provide general price indicators, but more granular analysis will be required for market participants to truly assess price movements. The wild spikes experienced in 2010 will likely be replaced with more gradual price trends this year. Price forecasts show varying levels of decline across all four regions in 2011, with local markets in the West expected to accumulate the largest overall losses.
California markets typically showed a faster rebound than other hard hit states as six of the 15 markets managed price gains (Riverside, San Diego, Los Angeles, San Jose, San Francisco, and Fresno). The only major California market to decline was Sacramento (-1.4 percent price change).
North San Diego County Coastal, Detached Solds, by price range:
1,044 sales, $304/sf
1,106 sales, $312/sf
653 sales, $354/sf
717 sales, $364/sf
541 sales, $616/sf
623 sales, $527/sf
All but one category improved this year, with total sales up 9%.
J. Mann, flipper
2009 – 292 sales, $214/sf
2010 – 356 sales, $215/sf
They need to make a movie about this operation.
San Diego SFR Foreclosures (trustee sales from foreclosureradar.com)
2009 – 8,732 (6,883 REOs/1,849 third-party buys)
2010 – 7,441 (5,132 REOs/2,309 third-party buys)
15% drop-off, could use a surge just to catch up.
NSDCC SFR Foreclosures (trustee sales)
2009 – 437 (365/72)
2010 – 450 (316/134)
There were only 196 sold REO listings on the MLS in 2010, so there are some NSDCC bank-owneds laying around somewhere. But 100 or so properties in process aren’t enough to tilt the scale. There are some REO listing agents who aren’t marking their listings as REOs on the MLS too.
Excerpt from Peter Schiff’s article seen inthe WSJ:
How has the market found the strength to stop its descent? No one is making the case that fundamentals have improved. Instead, there is widespread agreement that government intervention stopped the free fall. The home buyer’s tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices. Without these artificial props, prices would have likely continued to fall.
Where would prices go if these props were removed? Given the current conditions in the real-estate market, with bloated inventories, 9.8% unemployment, a dysfunctional mortgage industry and shattered illusions of real-estate riches, does it makes sense that prices should simply fall back to the trend line? I would argue that they should overshoot on the downside.
With a bleak economic prospect stretching far out into the future, I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years, particularly if mortgage rates rise to more typical levels of 6%. That would put the index at 114.02, or prices 28.3% below where we are now. Even a 5% dip would put us at 120.36, or 24.32% below current prices. If rates stay low, price dips may be less severe, but inflation will be higher.
From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with.
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