The U.S. housing market could experience significant challenges in 2020. In particular, home values are expected to decline in some cities, home sales will decrease, and the country could face its lowest housing inventory yet.
According to realtor.com’s forecast, existing home sales will decrease 1.8% from 2019, and home prices will plateau nationally, with just a 0.8% annual increase. Furthermore, home prices will fall in a quarter of the country’s 100 largest metropolitan markets – including St. Louis, Dallas, San Francisco, Chicago, Detroit, Miami, and Las Vegas.
Considering the current stronger economy and demand for homes, the forecast may seem surprising. But, the housing market at the moment is unique.
George Ratiu, senior economist at realtor.com, explained during an interview with CNBC:
“Real estate fundamentals remain entangled in a lattice of continuing demand, tight supply and disciplined financial underwriting. Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can’t find.”
Supply Plays Large Part in Forecast
The inventory of homes for sale in the U.S. has been steadily declining for the past several years, and the most affordable homes are seeing the majority of this inventory shortage. As a result, home prices have risen, which has affected affordability.
The forecast notes that demand for homes will likely increase in the spring – mostly due to more millennials who will be looking to buy. This could mean the home supply may dip to its lowest in history. Moreover, with upcoming possible decreases in home prices, baby boomer homeowners may decide not to sell, leading to even less supply.
With millennials waiting longer to purchase homes, they’re also often skipping over the traditional starter homes and going straight for larger, mid-priced homes. In 2020, this will increase pressure on the market’s middle range.
Furthermore, based on the forecast, millennials will make up 50% of all mortgage holders by spring; specifically, close to 5 million millennials will be turning 30 (when most buy their first home), and the oldest millennials will be turning 39 (when most look for larger homes for their families).
While single-family construction will jump 6% annually in 2020, it likely won’t be enough to completely offset the supply shortage.
Additionally, most current homeowners are staying longer in their homes, according to U.S. Census Bureau information analyzed by real estate brokerage Redfin. In fact, the average American homeowner has lived in their home for 13 years – an increase from 2010, when the number was eight years.
This is because more homeowners are opting to age in place – thanks to things like increased equity that outweighs what homes could sell for – as well as accessibility of amenities and neighborhood walkability. Additionally, some cities have implemented policies that reduce the property taxes seniors are required to pay, therefore making it more attractive to stay in their homes longer.
Rentals Contribute to Supply Shortage
Another factor in the U.S. housing supply shortage stems from the previous foreclosure crisis. At that time, investors purchased millions of foreclosed properties and turned them into rentals. What’s more, most of these foreclosed homes purchased were in lower price ranges.
While the original intention for many investors was to sell the homes once the market recovered, they instead chose to hold onto the homes and continue renting them. This meant that the housing supply did not return to its previous levels. As noted by Ratiu:
“The supply of rental properties has risen in tandem with demand, while new residential construction has lagged, placing the rental market in a good position to offer alternatives for buyers priced out of their markets. However, the affordability challenge will continue to cast a shadow over housing in 2020, as both home prices and rents remain elevated.”
While the forecast for 2020 presents a housing market that could make finding a home difficult for first-time buyers, this could be remedied somewhat if builders focus on mid-priced homes and take advantage of the lower mortgage rates available to potential homebuyers. An increase in the supply of existing homes for sale would also help alleviate some of the pressure caused by the inventory shortage.