Housing Outlook 2018: 6 Predictions From The Experts
In 2017 Americans learned to expect the unexpected, whether it be politics, weather or housing. Driven by record low inventory, little about the housing market went as forecast last year. “We thought there would be some things to take the pressure off,” reflects Skylar Olsen, senior economist at home search site Zillow. Interest rates would rise. Construction would pick up. Price growth would moderate. “That did not happen at any impactful level.”
Instead the market got hotter: inventory tightened, prices rose, mortgage rates barely budged and, though new home construction picked up at the end of the year, it was not at the starter price points where new inventory is needed most. Like the soaring stock market, the housing market often seemed disconnected from the tumult in Washington and natural disasters elsewhere. Observes Javier Vivas, director of economic research for Realtor.com: “We saw the economic growth and the economic momentum function as an override for a lot of external forces.”
With few clear signs of supply relief and the impact of the new tax law still being digested, reading the housing tea leaves is particularly challenging this year, but here are six things experts expect to happen:
1. The pace of sales will slow early in the year—but not for long.
Several provisions in the tax bill signed into law by President Trump last month will directly impact housing. These include changes to the mortgage interest deduction and to property tax deductions. Other changes will impact how much money people have, requiring decisions on how to spend it. Experts anticipate households will take some time to do the math on how the tax plan impacts them and the value of their home before making any big moves. Nevertheless underlying demand should remain strong after the best year for wage growth since the recession. Pent up demand from renters who have been unable to find suitable homes to buy also means the lid won’t stay on for long.
Read more on how the new tax law could impact housing here.
2. Inventory will continue to be a drag.
A crippling lack of inventory remained the defining trait of the housing market in 2017. At the start experts believed the crunch that characterized 2016 would bottom out; instead it grew worse. According to Zillow, housing inventory declined 10.5% in the 12 months ending in November. Data from brokerage Redfin shows that in November 2017 there were 653,347 homes for sale across the country. In November 2010 there were 967,604. Low inventory, says Olsen, “drove all the dynamics that we saw, from bidding war in the hottest U.S. housing markets, to the incredibly fast home value appreciation” across the country.
Looking to 2018, the general consensus is that inventory will pick up slightly. The biggest reason for this modest optimism is that the current situation is unsustainable. Prices cannot rise faster than wages forever. Plus, life events will eventually force reluctant sellers off the sidelines. Home search site Trulia found that 31% of Americans believe 2018 will be a better year then 2017 to sell a home, far more than the 14% who this it will be worse. (Though only 6% of homeowners say they plan to sell.) Another positive signal? New construction has started to swing away from apartments, typically built to rent, to single-family homes, which are built to own.
However, it has become clear that the typical assumption that demand and strong prices will entice construction are not holding true this cycle. There are structural reasons builders aren’t building: the high cost of land, skilled labor and building material, lack of buildable space and local regulations against density. Recently, however, builder sentiment has been brighter than consumer sentiment.
For a sign of how bad things have gotten, Nela Richardson, chief economist at Redfin, points to the aftermath of hurricanes and wildfires that wreaked havoc last year. Following those tragedies construction resources went to the places where it was needed most. This was necessary, but it “flat lined growth” elsewhere, says Richardson. Meanwhile, in the debate about the tax plan lawmakers indicated inventory woes are not top of mind, suggesting no policy relief on the horizon.
3. Price growth will slow—but not stop.
National home prices have climbed for 23 consecutive months. From January through October 2017 the Case-Shiller U.S. National Home Price Index increased 5.92%, on track for the biggest gains since 2013 when the market was finally recovering from the bust. The hottest markets last year were western cities like Seattle and Las Vegas where closing prices rose 12.7% and 10.2% respectively. Experts say prices will continue their march higher in 2018, but the rate of increases will slow. “Underlying the rising prices for both new and existing homes are low interest rates, low unemployment and continuing economic growth. Some of these favorable factors may shift in 2018,” noted David Blitzer, head of the Index Committee at S&P in the most recent release of the monthly reading.
4. The rent versus buy equation could tilt toward renting in costly markets.
Thanks to the new tax law, it just got more expensive to own a home in high tax and high price places. For some people the changes, combined with rising prices, may mean renting makes more financial sense than buying. “Since home prices are rising faster than wages, salaries, and inflation, some areas could see potential home buyers compelled to look at renting” particularly in expensive West Coast cities, noted Blitzer.
“We begin 2018 with a frigid cloud of uncertainty surrounding the impact of the new tax bill that restricts State and Local tax deductions, both very high in states such as New York, New Jersey, Connecticut, California and Illinois,” noted Leonard Steinberg, president of brokerage Compass, in an e-mail with his quarterly report on the New York’s luxury market. “Will uncertainty lead the consumer to become a society of renters with diminished incentives to buy?” He thinks not.
Nevertheless, high rents and student debt loads have also made it difficult for young households to save up a down payment even if they can afford the monthly mortgage. Moreover, with prices rising so fast even a small increase in mortgage rates can put people over the edge on affordability. (Also read: Millennials Get A New Way To Clear The Down Payment Hurdle To Homeownership)
5. Mortgage rates will hover around 4%.
In December the Federal Reserve bumped short term interest rates 25 basis points to between 1.25% and 1.50%. Historically, movement from the Fed has had a corresponding effect on mortgage rates, but three hikes in 2017 and two in 2016 only moved the cost of a home loan slightly higher, casting doubt on just how much of a difference the three hikes Fed policy makers have projected for 2018 will have on housing.
Experts tend to agree mortgage rates will finish the year between 4% and 4.5%. That’s a touch higher than the rates for most of 2017 but still historically low. What they disagree on is how we’ll get there. Ralph McLaughlin, chief economist at Trulia, for example, expects a slow and steady rise. Greg McBride, chief financial analyst at Bankrate.com, anticipates volatility with rates “dipping below 4% at least once, spiking above 4.5% and closing the year around 4.5%.”
6. Millennial demand for housing will keep climbing.
After a decade of decline the homeownership rate finally ticked up in 2017. By the third quarter, 63.9% of households were occupied by owners--up from a low of 62.9% in the second quarter of 2016. McLaughlin says 2017 will be remembered as “the year the bleeding stopped and the healing started.” As Millennials age this trend is expected to continue. The generation of adults born after 1980 were slow to enter the housing market, but as a growing share of them get married and have kids they are buying homes at rates equal to their parents. In fact, single millennials are more likely to own a home than prior generations of singles.
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