Home Bay's 2019 Real Estate Predictions- Halftime Report

By John Todd

Posted on August 29th, 2019

At the beginning of the year, I laid out three reasons why I expected the real estate bull market to continue in 2019, and so far this year, my predictions have generally trended in the right direction. However, market conditions are pointing in several uneven ways, and while I generally think the bull market will continue in 2019, there are reasons for concern over a slowdown.

Home Bay's 2019 Real Estate Predictions- Halftime Report

Below are how my three predictions stack up so far this year:

Prediction #1: Housing prices growth will outweigh rising inventory levels and tempered demand

Verdict: Mostly true

My bullish outlook for 2019 has largely held up so far, but, as predicted, several factors are pushing and pulling the market unevenly.

First and foremost, I accurately predicted that housing prices would continue to grow, with the June US median listing price at $316,000, up 5.6% year-over-year, according to Realtor.com. While this pace has slowed down in the sense that June 2018 had an 8.7% year-over-year increase, it’s still above the forecasted 4.7% compound annual growth rate (CAGR) for 2017-2019, based on data from the US Census Bureau and the National Association of Realtors (NAR). Moreover, data from NAR shows that home prices have increased year-over-year for 87 months in a row through May 2019.

Meanwhile, inventory has been growing, albeit slowly and with signs of further deceleration. Realtor.com data shows that inventory grew at 2.8% year over year in June 2019, but the amount of newly listed properties fell 2.3%. Plus, private housing starts were down 4.7% year-over-year in May 2019, according to the US Census Bureau and Department of Housing and Urban Development.

This tempered inventory growth has coincided with mixed demand. Fewer Americans think it’s a good time to buy a home, with the net share dropping five percentage points year-over-year in June 2019, according to Fannie Mae. However, there is strong demand at the lower end of the market, with Realtor.com identifying a surplus in demand for listings between $100,000-$340,000.

Altogether, the amount of existing home sales is down 1.1%, finds NAR, but sales rebounded in May following a slow March and April. As such, I remain optimistic that the overall value of the real estate market will grow in 2019, driven by prices outpacing muted sales activity.

Prediction #2: Millennials will help lift the market

Verdict: Mostly false

Part of the reason why I was optimistic about the strength of the real estate market at the beginning of the year was because of Millennials’ status as the largest segment of homebuyers and the many positive signs indicating they would buoy the market. So far in 2019, Millennials continue to provide demand, but the lack of supply at the lower end of the market—which fit the needs for many young, first-time buyers—has limited the growth of home sales.

In the spring of 2019, first-time homebuyers (a group primarily comprised of Millennials) accounted for 42% of shoppers, according to Realtor.com. At the same time, 42% of this group said they haven’t closed yet because they haven’t found a good house that fits their budget, whereas only 29% felt that way in 2017.

This gap between demand and affordable inventory perhaps explains why Millennials are relatively split on whether this a good time to buy — 54% say yes, and 46% say no, finds a 2019 NAR survey. In comparison, 62% of Gen Xers and 72% of Younger Boomers (54-63 years old) say it’s a good time to buy. The NAR survey also found that 53% of Millennials, the largest share of any generation, expect home prices will go up over the next six months.

Since I agree that home prices are likely to continue to grow, I think Millennials will continue to face challenges finding affordable homes, which could limit the entry of first-time buyers. Millennials will still be an important home-buying segment throughout the rest of the year, and sellers in this age group will benefit from the higher prices, but their ability to lift the overall market appears less likely due to bringing in fewer new entrants.

Instead, more needs to be done to help Millennials find homes within their budget, such as increasing access to real estate technology that makes home-buying more efficient and affordable, along with macroeconomic changes occurring, such as wage growth and interest rate drops to ease budget constraints. While these changes do appear to be underway to some degree, it does not appear likely that they will occur fast enough to turn this trend around before the end of the year.

Prediction #3: The real estate market will rise above economic and political headwinds

Verdict: Mostly true

In many ways, the economic and political headwinds that appeared likely to affect the real estate market a few months ago have now retreated. At the beginning of the year, it seemed that The Federal Reserve would increase the federal funds rate (the benchmark from which other interest rates are set) twice more in 2019, but now it looks like a rate cut is coming in the near future.

With a rate cut, mortgages would likely become more affordable, which could help the Millennial cohort, but perhaps not enough to boost home-buying significantly: The decision to lower rates tends to coincide with signs of a slowing economy, which could mean that wages will not increase fast enough to outweigh home price appreciation. Worse, a larger downturn could coincide with both falling home prices and weakened demand, though that does not appear to be imminent.

On a brighter note, fears over trade wars and tariffs dragging down the real estate market have retreated somewhat in 2019. While the situation remains volatile, the largest players in this trade issue—the US and China—appear closer to working out an agreement, particularly given that the Chinese economy slowed down to 6.2% GDP growth in the second quarter of 2019—still a high number, but the lowest quarterly rate since 1992, as CNN reports.

A new trade agreement with friendlier tariff terms would make construction more affordable, which could buoy the market by making homes more affordable to build and renovate.

However, given the fluidity of the situation and the time it could take for a trade deal to come into effect, it does not look like there will be a significant impact in 2019. Still, the economic and political picture generally look brighter than they did at the start of the year in the sense that these external factors seem less likely to hurt affordability, and consumer confidence could increase with more stable geopolitical situations.

The Bottom Line

Given the unevenness of several market conditions — interest rate cuts, for example, could be a sign of more mortgage activity or a slowdown in buying power — it’s even more important now to increase efficiency within the real estate market to make buying and selling easier and more affordable for all.

Full-service digital real estate brokerages, limited & discount service providers, iBuyers and other digital tools and platforms look even more likely to grow throughout the rest of the year than they did at the beginning of 2019, given recent legal challenges to the Multiple Listing Service (MLS) and pre-defined commission structures.

Still, this shift will likely take several years rather than just a few months. As such, the challenges apparent in the real estate market appear likely to largely persist in 2019, and the overall picture points to slow, albeit continued, growth.

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Posted in Real Estate & Technology, Real Estate Market, Real Estate Myths, Real Estate Trends