As 2019 draws to a close, we reflect on the significant trends that took place this year in the real estate industry this year, from rising interest rates to changes in how transactions are conducted, and also look ahead to its future influences for sellers and buyers as we enter into a new decade.
It was a good year for consumers in residential real estate. Here are six highlights from this past year that could fundamentally shape the residential real estate market by creating a more efficient and open market heading into 2020.
Ban on Pocket Listings
While exclusivity may seem to be a positive in real estate, a more open, transparent market could ultimately lead to a stronger industry, and the National Association of Realtors® ban on pocket listings provides a significant step in that direction. By passing the Clear Cooperation policy in 2019 (taking full effect by May 1, 2020), NAR® will curb instances where an agent or broker can market listings to a select group instead of a wider pool through a multiple listing service (MLS). This ban means sellers will have access to a broader range of buyers, which can lead to quicker sales and potentially more offers so that sellers can choose the deals they prefer.
Buyers will also have access to more inventory, which can help overcome the current challenge of limited housing supply in many markets. Conversely, exclusive listings can artificially shrink supply, which can create unsustainable price bubbles when buyers push prices up for limited housing stock to inflated levels. Having a more open, transparent market can help the real estate industry grow more steadily to the benefit of more sellers, buyers, agents and other real estate participants.
Lawsuits Take Aim at Real Estate Commissions
Pending litigation could also lead to a more open and equitable market by dismantling the traditional real estate model of sellers’ agents setting commission rates when sharing listings through an MLS. Typically, sellers’ agents set a 6% commission rate to then split with buyers’ agents. Yet, for example, one class-action lawsuit against The National Association of Realtors (NAR) and four large real estate brokerages (Realogy, HomeServices of America, RE/MAX and Keller Williams) alleges that these organizations have conspired to make sellers bear these full costs that otherwise “would be borne by the buyer in a competitive market,” as the docket uploaded by Courthouse News Service states.
This lawsuit and similar litigation could lead to lower fees and more competition going forward, either through legal changes or through public attention that causes real estate participants to make changes. If listing agents did not set commission rates to share with buyers’ agents, they might charge less than 6%, which could enable sellers to save money while also potentially lowering their listing prices. In a true open market system, sellers would set commissions for both the buyer’s agent and listing agent and let agents compete for that business. Paying a lower commission allows sellers to keep more profit, giving sellers greater flexibility on pricing. Lower selling prices is a win for buyers who will pay lower property tax and monthly mortgage payments, both of which impact the buyer far beyond the transaction date.
Moreover, buyers and sellers may also turn more to brokerages offering alternative fee structures, such as a fixed fee model that can cost significantly less than percentage-based fees.
Falling Interest Rates
From 2015-2018, the Federal Reserve slowly raised interest rates after a long period of essentially keeping rates at zero following the Great Recession of 2007-2008. However, in July 2019, the Fed reversed course and started to decrease rates again. Overall in 2019, the Fed cut rates three times, and while these decisions only directly affect banks’ short-term lending rates with each other, they generally correlate with other types of interest rates, such as for mortgages.
For example, based on data from the Federal Reserve Bank of St. Louis, interest rates for 30-year fixed mortgages climbed to nearly 5% in November 2018 and now sit below 4% as 2019 comes to an end. These lower rates may spur some buyers to jump into the real estate market and purchase a new home with a relatively low mortgage rate. However, as a Redfin analysis finds, this additional demand can push prices up, so sellers may be the real winners here.
Another question going forward may be whether these falling interest rates signal a looming economic slowdown, which could affect the real estate market. However, recession fears have seemed to fade recently, due to factors such as easing trade tensions. Given the continuing trend of limited inventory, which we’ll cover next, even if rates were to rise or the economy slows, buyer activity may not significantly slow in the near future.
Mixed Trends in Housing Availability
Housing inventory relies on new home builds and existing home sale to meet the demands of buyers. First, the number of new housing starts continued to climb in 2019, with the latest monthly data from November 2019 clocking in 13.6% above the number of housing starts in November 2018. Year-to-date stats show a more modest gain of 0.6% compared to the same period in 2018, but the numbers have still been trending up, led by gains in the South.
However, many analysts, including Realtor.com’s senior economist George Ratiu, call for the lowest home inventory in 2020, especially for first time buyers. Most new housing starts are not in the entry price tier that favor first time buyers. Existing home inventory is equally challenged. An increasing number of Baby Boomers aging in place and increasing homeownership tenure, which now average at 13 years, both tie up existing home inventory levels. Currently, 55.2% of all owner-occupied homes are owned by people age 50 or older. Both trends will contribute to a predicted 1.8% drop in existing home sales by 2020.
A lack of housing supply could create pricing bubbles, similar to pocket listings but on a greater scale. Similarly, a lack of supply could slow down real estate activity. November 2019 data from NAR® shows existing-home sales fell 1.7% from October to November, with Lawrence Yun, NAR’s chief economist, noting in a press release that “Sales will be choppy when inventory levels are low, but the economy is otherwise performing very well with more than 2 million job gains in the past year.”
Home builder sentiment is the strongest in 20 years. “Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes, low mortgage rates and a strong labor market,” said NAHB Chairman Greg Ugalde, a home builder and developer from Torrington, Conn.
Low mortgage rates will drive demand but buyers will have to first find homes to buy, and all indicators point to the supply of homes continuing to lag behind demand in 2020.
Rise of iBuyers
While iBuyers have been around for a few years, this category of real estate participants really started to hit their stride in 2019 and expanded to more markets. For example, one of the largest iBuyers, Zillow Offers, expanded to markets like Dallas-Fort Worth, Los Angeles/Orange County, Miami/Ft. Lauderdale and more in 2019.
iBuyers provide sellers with an efficient way to sell their homes, as they can go online to a company like Zillow to get an instant offer determined by an algorithm. Instead of going through the lengthy process of listing, showing and closing homes, the whole sale to an iBuyer can close in a few days rather than weeks or months.
More markets will likely be able to use iBuyers in 2020 and beyond, and their growing relevance will help facilitate more transactions. That means that buyers could also benefit from more inventory if more sellers are encouraged to go through with this process, rather than keeping their homes off the market due to not wanting to deal with the challenge of trying to sell a home.
However, real estate participants should be aware of potential downsides to iBuyers, such as sellers taking a slight discount on their sales price in exchange for convenience. In addition, buyers might face drawbacks such as limited consumer choice as iBuyers try to offer complementary services, which Mike DelPrete, a global real estate tech strategist, notes in his recent study.
Advancements Using AI
Artificial intelligence (AI) is another area that is not necessarily new to real estate but one that has become more ingrained in the market over the course of 2019. For one, AI can improve pricing estimates, which can help iBuyers while also improving market transparency through tools such as the Zillow Zestimate so participants can get a sense of what a home is worth.
For example, in 2019 the Zestimate tool gained the ability to use the AI subset known as computer vision to analyze photos of a home, including identifying features like granite countertops, to inform estimates.
Real estate companies are also using AI to improve their services to clients, such as how brokerages like Compass added new AI capabilities in 2019 to provide recommended listings to consumers browsing properties online. Going forward, AI appears likely to further increase efficiency for everyone involved in real estate transactions.
Each of these six key events and trends significantly impacted the residential real estate market in 2019, and together they could have an even more profound effect on the future. Low interest rates in an otherwise stable economy could spur more housing development, with borrowers willing to take on relatively low-interest-rate loans to fund construction. The ban on pocket listings and scrutiny over commission structures could have a synergistic effect of buyers and sellers demanding more transparency from the collective industry. But short supply will continue to make the market highly competitive, driving up prices and putting further pressure on the acceptance of high commission rates. As these trends continue to influence the market in 2020, more real estate participants are more likely to turn to brokerages like Home Bay that compete based on transparency, innovative technology and most importantly, saving money.
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