Welcome to Passive Real Estate Investing. I’m your host Marco Santarelli.
Ask some investors what they think about the housing market going forward and they will simply shrug their shoulders or give you some wild prediction based on media misinformation or personal concerns. The reality is, housing markets around the country had made a substantial recovery since the great recession ended in June 2009, and many real estate markets began turning around in 2012 and 2013.
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After the Coronavirus pandemic came into being, housing market predictions for 2020 and beyond ran the gamut from optimistic to pessimistic. The housing market overall was running at a record pace in the early stages of this outbreak in February 2020, with sellers continuing to make gains and buyers benefiting from lower mortgage rates.
The pace of home sales relative to inventory reached a new record high in February, although hints of deceleration were beginning to surface. Realtor.com’s recent report in April 2020 shows that while still posting a double-digit drop over last year, February marked the smallest yearly decline in the monthly supply of inventory since October of last year.
Nine of the largest 50 markets are slowing down on a yearly basis, with 20 of the top 50 doing so on a monthly basis.
While the effect of lower mortgage rates reignited housing market activity toward the end of 2019 and the start of 2020, February showed some early signs of the Coronavirus outbreak, particularly in markets that were hit early and hard
The latest housing market indicators point to a shift towards more balanced conditions in the short term.
As of February, the top 5 markets favoring sellers are Phoenix, Salt Lake City, San Diego, Riverside and Baltimore. These markets are heating up the fastest on a yearly basis, with a month’s supply of homes down by at least 52 percent year over year (as compared to last February).
As of February, the top 5 markets favoring buyers are Pittsburgh, Rochester, Minneapolis, San Francisco and Tampa. These markets are cooling off the fastest on a yearly basis, with a month’s supply of homes up at least 26 percent year over year (as compared to last February).
The Response
The response to the Coronavirus crisis is unprecedented. The federal government ordered a de facto shutdown of the entire private economy, closing an estimated eighty percent of businesses. It has caused unemployment to soar with more than 30 million Americans recently filing first-time unemployment claims, smashing all previous records.
Updated disease models and new information on the Coronavirus death rate show that this was probably an over-reaction to a new disease. However, we can draw from prior economic crises to predict the impact this government shutdown on large portions of the economy will have on the housing market.
2020 Housing Market Forecast Before The Outbreak
Realtor.com said in their national housing forecast that home price growth will flatten, with an expected increase of 0.8 percent. Inventory will remain constrained, especially at the entry-level price segment. Mortgage rates are likely to bump up to 3.88 percent by the end of the year. Tight inventory coupled with rising mortgage rates will lead to dropping sales. Buyers will continue to move to affordability, benefiting smaller and mid-sized markets.
Zillow had predicted that there will be a housing recession in 2020. They blamed monetary policy for this; the market has been expanding rapidly but is due for a correction. They also cite housing affordability or a lack thereof. That means the Millennials hitting the ideal age to buy their first home often can’t afford it or build it.
What does this mean for the overall housing market in 2020?
We’ll see prices for affordable and starter homes continue to increase at near double-digit rates while the general real estate market goes up at near or just above the rate of inflation. Specific areas may appreciate or depreciate depending on inventory and demand. We can use the consumer’s demand for each generation to give us a housing market forecast for 2020 and beyond.
The inflation of new home prices has slowed to something close to the rate of inflation. However, we shouldn’t expect housing prices to fall, since the cost of new construction is going up. A lack of people in the skilled trades and increases in the minimum wage will increase the pay rates of those building homes. That’s aside from the steadily inflating material costs.
Baby Boomers continue to have a major impact on the housing market, though this is radically different to how older generations impacted housing markets in the past. Baby Boomers are much more likely to remain healthy and active in their old age.
This means they’re less likely to pass-away or sell the family home to a young family and move into assisted living. When the retiree decides to downsize, they may sell the 2500 square foot single-family home, but they compete for a smaller starter home instead of moving into a retired adult community.
The divorce rate and broken families of the past few decades exacerbate things, too. Mom or Dad live alone in the house instead of sharing it with their significant other. Housing demand is driven by the number of households, not the number of adults, so divorced and single individuals drive up demand for their own homes, too.
The sheer cost and inconvenience of moving has resulted in the average time people remain in one place to increase. In 2019, the average person remained in the same house for roughly eight years. For comparison, the average stay was only four years in 2007.
This results in less churn in the housing market and fewer available existing homes on the market. At the same time, Generation Xers were hard hit by the Great Recession. They’ve really only recovered since 2012. This means that Generation Xers are much more likely to remain in the rental market than prior generations at that age. This drives up rental rates and eats into the rental supply. Yet this generation hasn’t abandoned the dream of owning a home, thus increasing demand for starter homes.
Housing market predictions for 2020 and beyond run the gamut from optimistic to pessimistic.
In short, home prices will continue to rise slowly due to limited supply and demand, but homes that meet Millennial’s ideals and their budgets will continue to appreciate at double-digit rates.
Current Housing Sales and Their Forecast
Home sales generally pick up in the spring. People start shopping for new homes around Spring Break with the hope of moving over holiday weekends like Memorial Day weekend or moving during the summer when it has the least impact on their kids’ education. This is why housing market predictions always include an increase in sales between March and September.
The federal government’s shutdown of so-called non-essential businesses put a hold on most real estate transactions. Rent and mortgage payments may be deferred in some cases, but others continue to pay their bills so they don’t have to worry about a lump sum due in four months.
But the shutdown intended to slow the spread of the coronavirus has stalled real estate sales. Transactions that were already underway were completed. And real estate agents are trying to shift to virtual home tours using panoramic pictures of every room and drone photography.
This will help complete some home sales, but it isn’t enough to get people to sign the dotted line at the rate they used to. After all, you can’t get home inspectors and appraisers out to properties during government-ordered shutdowns, and that’s essential to completing a real estate transaction.
Capital Economics (a leading independent macroeconomic research firm) predicts that we’ll see a one-third decline in home sales for the spring of 2020. Fannie Mae is assuming that the economic shutdown will last through May and the spike in unemployment will drag on the housing market for the entire year. This is why Fannie Mae is predicting a 15 percent drop in home sales volume for 2020 compared to 2019 numbers.
Current Avg. Home Prices and Predictions
Before the COVID-19 pandemic literally went viral, US housing market predictions for 2020 showed appreciation of roughly 1 percent, as a nationwide average. Existing home sales were predicted to fall about two percent, while single-family home starts were predicted to increase six percent.
The general forecast is that home prices will fall through the end of 2020 before recovering in the spring of 2021. For example, Zillow housing market predictions show prices falling through the fall of 2021. They expect to see home prices recovering in 2021.
Current Housing Inventory (Supply) and its Forecast
US housing market predictions for 2020 project that newly built homes will be slow to sell. Existing homes are slow to sell, too. And this sentiment is found across the housing industry. The builder confidence index saw its largest ever recorded a drop in March 2020.
The National Association of Homebuilders index fell a record 42 points in April 2020 to just 30. An index of 50 or higher means homebuilders are optimistic. That means home builders may finish projects they’re working on, but they are unlikely to start entirely new projects.
Long-term, the coronavirus pandemic will constrict housing supply. Construction is, in theory, essential. For example, plumbers and electricians could work in an unoccupied building and install infrastructure, assuming they’re far enough from each other. Unfortunately, social distancing rules did slow down new construction.
The public doesn’t see the likely shortages of building supplies because companies making asphalt shingles, PVC pipe and other materials were often shuttered at the same time.
Travel restrictions crimped new construction, as well. Quarantining a city means builders can’t get specialty contractors in. They’ll choose to go elsewhere. Travel restrictions made it hard for people who might be willing to come to reach potential worksites. And rigid licensing laws make it difficult to bring in out-of-state tradesmen.
That’s been an issue for years, but the cost of these policies hasn’t been this apparent before. And while states are busy making it easier for nurses to work across state lines, no one pays attention to the lack of HVAC installers. We can also expect home builders to focus their limited resources (people and material) on luxury homes that have a higher profit margin.
This is why the median price for new homes is expected to increase. This will exacerbate the shortage of affordable homes, causing greater increases in the price of new and existing affordable homes.
Current Housing Demand and its Forecast
Housing market predictions that take Covid-19 into account have already come out. Capital Economics is estimating four million homes will be sold in 2020. This would be the lowest rate since 1991. For comparison, roughly 5.3 million homes sold in 2019.
The trade war with China threatened international trade, creating a cloud that deferred business investment. Now we’re looking at a certain economic downturn due to the government’s choice to close the vast majority of businesses, nearly killing the service economy.
Experts think that the economic cost we’ve paid to try to contain the virus will weight down the economy into 2021. That is why home sales are expected to be around six million in 2021 instead of the previously projected 6.3 million.
Economic sentiment affected the U.S. housing market, too. The number of homes for sale fell nearly 16 percent in March 2020, after listings fell 15 percent year over year in February. This was equal to roughly 200,000 homes being taken off the market.
People were reluctant or unable to show their homes, while others are afraid it won’t sell and thus didn’t list their homes at all. US housing market predictions for the longer term will depend on the lingering impact of this Coronavirus. How long will it take for the economy to return to normal? How quickly will the service economy re-open and get people back to work?
Economic Outlook & Housing Market In 2020
The Fed has dropped interest rates in an attempt to stimulate the economy. We can expect a wave of mortgage refinances in order to save money. Fannie Mae predicts 40% more mortgage refinances in 2020 than 2019.
Low-interest rates are an opportunity for homebuyers who qualify. That gives potential home sellers hope, though it will take time for these low-interest rates to offset the spike in unemployment and general economic malaise.
Housing Affordability Index – Median Household Income vs Median Home Price
Affordability was already a problem for the US housing market before the coronavirus hit. There was a shortage of affordable housing, driving up the cost of the homes Millennials can afford. This is important since half of all home mortgages are given to Millennials. And they are forced to compete for new housing stock since Baby Boomers and Generation Xers tend to hold onto their homes.
The housing affordability index determines the affordability of the housing market by comparing the median household income to the median home price. The national housing affordability index was 170.0 for February 2020. That was a nearly one percent increase from the prior month and an eight percent increase from a year before.
An affordability index of 100 would mean that the average person could afford the average home. An increasing affordability index means more people are priced out of the housing market.
The economic fallout of the coronavirus is probably going to make housing less affordable, not more so. The official unemployment rate jumping ten percentage points or more means many people are out of work. We don’t really know how many have had their hours cut or are officially still employed though furloughed.
All of this adds up to tens of millions of households seeing their income drop, many of them substantially. And home prices will remain steady or drop just a few percentage points. The end result is a dramatic drop in the average household income while the housing portion of this equation is almost unchanged.
Will the Housing Market Crash In 2020 or 2021?
What will 2020 be like for buyers? If you qualify for a mortgage, you have a more limited selection and prices close to what they were before the coronavirus hit, but you have relatively little competition.
What will 2020 be like for sellers? Expect homes to be slow to sell, and you may have to market it down to move it. Or you may need to wait a few months to see things shift from a buyer’s market to a balanced market. The only exception would be the “affordable” homes that are in short supply. In this case, you’ll have a seller’s market as soon as people are allowed to go back out shopping.
Even though the U.S. housing market likely won’t be the cause of the next recession, an economic downturn would still have an impact on the US real estate sector. The overall housing market could enter a recession in under five years, with Zillow predicting that it will occur in 2020.
The spillover to the housing market will rely upon the length, depth, and severity of the 2020 recession and, if some parts of the country feel the effect worse than others, some local housing markets could see greater effects.
Scott Anderson, the chief economist at Bank of the West, who was among those predicting a 2020 recession, said: “The current economic expansion is getting long in the tooth by historical standards, and more late-cycle signs are emerging.”
According to a survey published by WSJ, some 59% of private-sector economists surveyed in recent days said the economic expansion that began in mid-2009 was most likely to end in 2020. An additional 22% selected 2021, and smaller camps predicted the next recession would arrive the following year, in 2022 or at some unspecified later date.
In a research report in which Zillow surveyed 100 real estate experts and economists about their predictions for the housing market, it showed that almost 50% of all survey respondents said the next recession would start in 2020, with the first quarter of the year referred to the most as to when the recession would start.
The main culprit for a housing recession is monetary policy. The experts predicted that monetary policy will be the deciding factor this time around. In particular, they argued that the Federal Reserve could prompt slower growth if it raises short-term interest rates too quickly.
The Bottom Line for Investors
A great many local housing markets around the U.S. are ripe for investing in 2020, making it a great time to buy an investment property. We have a multi-generational housing market creating limited supply and increased competition, driving up prices at the affordable end of the market for the foreseeable future.
In hot job markets and communities that fit our younger generation’s ideals, price increases of 8-15 percent are still possible year-over-year. For everywhere else, real estate is appreciating at or just above the real rate of inflation.
Cash flow opportunities are abundant in markets all around the U.S., particularly in the Midwest, much of the South East and pockets of the North East.
America’s housing market is under-supplied by 3.3 million units, and the shortage is getting worse every year, by Freddie Mac. New housing supply is not keeping up with rising demand and that’s creating upward pressure on home prices as well as rents.With strong demand now and for the foreseeable future, real estate continues to be a sound, safe investment class.Of course, investing in the right markets and areas, and having the right team will help assure your success.
https://www.noradarealestate.com/blog/housing-market-predictions/
Stay safe and well.
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Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
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