Historically low mortgage rates, booming home price growth, inadequate inventory levels, and debates about crumbling affordability ruled the 2019 housing market. As the new year draws closer with rumors of a global recession and uncertainty generated by an impending election, one can imagine just how wild of a ride 2020 could be.
According to six economists the 2020’s housing market will be strikingly similar to 2019 — low mortgage rates will continue to bolster buyer demand, worsening affordability on the coasts will push buyers towards the South and Midwest, and the battle between millennials and Baby Boomers could intensify as inventory shortages continue.
The battle between supply and demand will continue…
The economists all agreed that low mortgage rates won’t be going anywhere with 30-year fixed mortgage rates stabilizing at 3.8 percent in 2020.
National Association of Realtors Chief Economist Lawrence Yun said rates could jump as high as 4 percent for a few weeks next year, but an overall healthy economy coupled with a low recession risk will keep mortgage rates stable, increasing buyers’ housing budgets.
From 2018 to 2019, mortgage rates dropped from an average of 4.54 percent to lows within the 3.6 percent range. That nearly one percent drop could arguably boost a buyer’s buying power by $30,000, according to an estimate by The Mortgage Report.
However, an imbalance between supply and demand has and will continue to stifle buyers’ ability to take advantage of their increased buying power due to low mortgage rates.
“These low rates are increasing buying power significantly, and when we talk about buying power, we’re talking about a combination of the rates and income converting into how much you can borrow and afford to buy,” First American Chief Economist Mark Fleming explained.
“As incomes have grown modestly and rates have come down, buying power in all relative terms has skyrocketed to historically high levels over the past 20 years.”
“That stimulates a lot of demand particularly amongst first-time homebuyers, but the challenge is that it’s very difficult to find anything to buy.”
Instead of backing out of the housing market, Redfin Chief Economist Daryl Fairweather said buyers will simply up the ante by making more competitive offers to nab whatever inventory is left.
“We expect about one in four offers to face bidding wars in 2020 compared to only one in 10 in 2019,” Fairweather predicted in a blog post.
The battles will be most intense in the entry-level market as a large share of Millennials will turn 30 in 2020.
“Overall buyer demand will remain very robust, particularly at the entry level, in 2020,” realtor.com Chief Economist George Ratiu said in an analysis published Wednesday. “The largest population cohort in the country (those born in 1990) will turn 30 in 2020, accounting for 4.8 million millennials hitting peak home buying age.”
“As a group, Millennials (those born 1981-1997) will take more than half of all mortgages next year,” he added.
Meanwhile, Freddie Mac Deputy Chief Economist Len Kiefer has a more moderate outlook on how low mortgage rates will impact buyer activity.
“While low mortgage rates will support the housing market, don’t look for a surge in activity,” Kiefer told Inman.
Lackluster inventory will bolster home price growth and stifle sales
Much like the past few years, lackluster inventory will continue to be a thorn in the housing market’s side. According to NAR’s latest existing-home sales report, there are 1.77 million units available representing a 3.9-month supply at the current sales pace.
The majority of the economists Inman spoke to expect inventory levels to worsen in 2020, with Ratiu predicting levels will reach historic lows.
“The market is still years away from reaching an adequate supply of homes to meet today’s demand from buyers,” Ratiu wrote. “The yearly declines are likely to be moderate and range between 1-to-5 percent for most of the year.”
The inventory shortage is most acute at the entry level, as the number of available homes priced $200,000 and under declined 8 percent year-over-year in 2019. Yun said that’s unlikely to change in 2020, as homebuilders focus on projects at the higher end of the market.
“It’s really for the builders to build more affordable homes. Sometimes the numbers do not work out for the builders,” Yun told Inman.
However, Yun said building at the higher end of the market could still benefit buyers at the lower end of the market by providing more inventory for older homeowners who want to trade up, but have few options.
“Building more expensive homes is still helpful because of the chain reaction [it causes],” he explained. “A current homeowner who’s been at their home for 10 years might want to trade up, but if there’s not a good selection of inventory then they’ll stay put for longer.”
“But if there is a new home, then they’ll move into that new home and release their existing home, which may have been a starter home when they purchased it 10 years ago,” he concluded.
Fleming and Fairweather said the imbalance between supply and demand could push annual home price appreciation to as high as 6 or 7 percent, although Fleming said there are some indices showing a slower rate of growth, at around 3 to 4 percent.
“That depends on which index you’re looking at,” Fleming noted. “I could easily see home price appreciation accelerating back to the 6 and 7 percent range, if not more in some markets as a result of the dynamics between strong demand and shortage of supply.”
Kiefer and Ratiu have lower expectations for annual home price growth, with predictions of 3.2 percent and 0.8 percent, respectively. Kiefer says the slowdown in home price appreciation will put sales on an upward track, with the pace increasing from 6.0 to 6.1 million in 2020 to 6.2 million in 2021.
“Despite those challenges, demographics are bringing millions of new households into the market over the next few years, which will provide a slow and steady tailwind for U.S. housing market activity,” Kiefer told Inman.
On the other hand, Ratiu expects existing-home sales to slide by 1.8 percent in 2020, with overall sales at best remaining flat. The minimal uptick in home price growth will be due to entry-level demand.
“The decline in sales is projected to be accompanied by a flattening in price growth,” Ratiu said. “With the supply of available homes continuing to balance on a tightrope, and the entry-level demand expected to remain strong, prices are estimated to tick up 0.8 percent in 2020.”
Fairweather expects home sales growth to be flat for much of 2020, but has a more optimistic outlook for the latter half the year as she expects sellers and homebuilders to ratchet up their activity.
“When homeowners see price growth start to exceed 5 percent in the first half of the year, we think more will be encouraged to sell in the latter half of the year,” Fairweather explained. “On the new construction side, homebuilder confidence is high and homebuilding activity is approaching pre-recession levels, this will add some much needed inventory later into 2020.”
Zillow economist Jeff Tucker agreed with Fairweather, saying that inventory levels will improve in 2020 as a large share of Baby Boomers age out of homeownership and homebuilders begin crafting smaller, affordable homes.
“We also know that the number of seniors selling their homes is going to ramp up across the board as millions of baby boomers age out of homeownership, but that trend is only just beginning,” Tucker said.
“Recently, new home sizes have begun to shrink for the first sustained stretch on record, and we expect that trend to continue as builders try to build more modest, affordable options for first-time home buyers stymied by the lack of starter home inventory in many cities.”
Secondary markets will experience a boom from buyers searching for better affordability
While some buyers may wait for the tides to turn in their respective markets, other buyers are deciding to make the move to more affordable secondary markets in the South and Midwest.
“For the past few years, Redfin has been reporting on people migrating from expensive coastal areas to more affordable inland areas, and I expect that trend will continue in 2020 and beyond,” Fairweather said.
Fairweather, Yun and Fleming expect markets such as Tampa, Charleston, Charlotte, Cleveland, Detroit, Indianapolis and Cincinnati to experience population booms from buyers that have been pushed out of insanely expensive markets on the West and East Coasts.
“I am most optimistic about home price growth in those more affordable markets where there’s solid job creation and has the potential for being a retirement destination,” Yun said while noting that well-to-do Baby Boomers are on the move as they look for homes in states with lower property taxes.
However, Fleming said buyers should be careful not to assume that better affordability will result in a quick buying experience. As competition heats up in those areas, inventory is being snapped up at a quicker rate.
“Typically people’s earnings in those markets with today’s mortgage rates can afford a lot of what’s for sale even if there’s not a lot of inventory,” he noted while speaking about the attention Rust Belt markets are receiving.
Ratiu expects buyer migrations to the South and Midwest to continue as the oldest Millennials search for family-friendly neighborhoods and Baby Boomers look to retire.
“With high-priced, coastal cities pricing out many young buyers, mid-sized markets in the Midwest and Southeast have attracted a rising share of both Millennials and Baby Boomers,” Ratiu mentioned. “With the influx of homebuyers, many of these markets are experiencing the effects of rising demand and insufficient supply, with evaporating inventories and higher prices.”
Minimal impact from the 2020 election…
As anxiety-inducing as the current election cycle is, economists aren’t worried about that anxiety pushing large groups of homebuyers to sit on the sidelines in the upcoming year.
“The country has intensely become more political than ever before, but I think buying a home is a pocketbook issue and if the conditions are right, the mortgage rates are low and they feel secure about their job and the right home comes onto the market, then people will take advantage of that situation,” said Yun.
Fairweather and Fleming say there could be a minimal, temporary slow down in sales after the election since any kind of economic or political uncertainty tends to give buyers pause.
“Our analysis of past election years shows that buyer and sellers are hesitant to enter the market immediately before and after election day, but it’s a temporary blip on the radar,” Fairweather said. “We don’t expect a significant impact on the national housing market overall.”
“So [the election] is potentially a factor that could drag on home sales, but by the same token when we do the research there are examples of recessions, which is an a classic example of an uncertainty-generating event, where home sales actually increased,” Fleming added.