Where the Real Estate Market is Headed in 2019: A Primer

2019 is going to be an interesting year for home buyers. High-dollar regions like the Bay Area, NYC, and other financial hubs show signs of slowing down. In less dense/regulated markets home builders are adding more inventory which should stabilize or lower prices in smaller markets. Lenders are under pressure from shareholders to reduce barriers to entry for home buyers, which will also have a positive effect on the ability for consumers to obtain home purchasing/refinancing credit. This credit easing is largely due to the fact that many experts are predicting double-digit declines in the larger housing market.


End of the Sellers Market?

Most real estate regions in the US have been in a seller's market since early 2013. Buyers have far outnumbered sellers in a number of markets due to inventory pressures, and migration to metro areas where job opportunities abound. Aside from some midsize markets, inventory is not coming online at a level that would change this paradigm.


There are signs of life on the horizon for home buyers-primarily the fact that housing prices have stabilized in many areas and it is no longer the norm to pay over listing price as the rule. There are increases in inventory in a number of key markets, but that fact is still not enough to overcome the enormous pent up demand that has been bottled up due to exorbitantly high home prices in many areas.  Population growth and new buyers coming on to the market are increasing, while inventory numbers are actually down from their highs in 2016-2017.


Mortgage Rates Rising

Mortgage rates have the potential to cause double-digit drops in home prices in the United States. Despite the fact that inventory is low, if a demand-side shock is caused by rising interest rates we will see a sharp market decline. During the last quarter of 2018, the rates for 30 year fixed mortgages went up by 3/4 of a percentage point, to hit an average of 4.75, which is almost a percentage point higher than at the same time in 2017. Rates are expected to continue to rise in 2019 as the fed tightens lending to avoid the deleterious effects of cheap credit on the market as a whole. Mortgage rates may fluctuate up and down during 2019, but they will almost certainly end higher than 2018.


The US Federal Reserve has an enormous impact on the housing market in the United States. Many people think of the housing market as a product of free market ideals, but nothing could be further from the truth. Interest rates affect everything from what inventory is produced, where it is built, how long homes stay on the market, and who buys a home. Affordable and low-income lending programs drive a significant portion of home sales, especially to first-time buyers. Local and state mortgage assistance programs also contribute to overall first- time buyer home sales. If these programs are scaled back along with other forms of social assistance this will also have an effect on low-income/first-time buyer oriented construction in markets across the US.



Smaller Homes Gain Popularity

The inventory issues faced in markets across the country have led to builders and developers building and selling smaller and less expensive homes. The skyrocketing value of land in many regions has led to smaller and more affordable homes being constructed, as opposed to the traditional larger SFH that once dominated the landscape. This trend started in late 2015 and early 2016 and has continued to accelerate year over year since then. In 2015, the average size of a home was 2,440 square feet, in 2018 it was 2,320 square feet, a reduction of almost 5 percent in three years. The overall lowering of inventory size has and will continue to create downward pressure on home prices. The same land that used to house a single family is being used to construct multiple dwellings on the same acreage which results in lowered prices for individual housing units.


Smaller homes may also cause a cascading effect of lowered demand in the higher-end of the housing market. As larger homes become less numerous, buyers and sellers of larger properties will decline. According to Javier Vivas, Economic Director at Realtor.com “Much of this slowing can be attributed to a wider selection of luxury homes for buyers and increased uncertainty over the last 12 months.” The fact that midsized SFH homes are so expensive has led to unsustainable growth in the million dollar plus market. These homes are seeing longer and longer amounts of time sitting on the market unsold, which is having a negative effect on prices on the high-end. This downward pressure will eventually affect more moderately priced homes as buyers and investors opt to purchase in markets that have more stability, and where they can easily buy and sell properties without having to wait 6 months to a year to find a buyer. This phenomenon is exemplified in the growth of many suburban and exurban areas due to sky-high prices- suburbs outside of New York City and the Bay Area being prime examples.


Seller Confidence Affecting Prices

Since we have been in a seller's market for more than half a decade, home sellers have come to expect the ability to sell for market value or higher. This attitude may lead to a glut of inventory as buyers and sellers are unable to reach agreements to sell houses, as their expectations are not in line. Unless there is a significant market-altering event like a recession or regional issues like natural disasters, this problem should solve itself over time. As sellers hold for longer, others, especially investors, may end up lowering their prices over time to move units. Still, in the short time the inability for buyers and sellers to reach common ground in respect to costs can have short and long term effects on the health of the real estate market.


The Bottom Line

The name of the game in the 2019 housing market is uncertainty. A plethora of problems in world markets, unstable governance, and the diminishing prospects of government-backed loans will all lead to a situation where the bull market in the housing industry may finally be ending. Do not be surprised if you see double digit drops of 10 percent or more in some overpriced regions. Only time will tell, but no bull market last forever- especially when it comes to real property.


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