Market Projections for The New Year: What's In Store For 2019?
I had the privilege of listening to Matthew Gardener as he gave his projections for 2019. He always has a fantastic way of summarizing big ticket items like the US economy all while projecting what he sees for Seattle and it’s surrounding market. Below is a summary of what Gardener projects for the new year and how both Seattleites and Americans are affected.
What a year it has been for both the U.S. economy and the national housing market. After several years of above-average economic and home price growth, 2018 marked the start of a slowdown in the residential real estate market. As the year comes to a close, it's time for Windermere Chief Economist, Matthew Gardner, to dust off his crystal ball to see what we can expect in 2019.
THE U.S. ECONOMY
Despite the turbulence that the ongoing trade wars with China are causing, Gardner still expects the U.S. economy to have one more year of relatively solid growth before we likely enter a recession in 2020. Yes, it's the dreaded "R" word, but before you panic, there are some things to bear in mind.
Firstly, any cyclical downturn will not be driven by housing. Although it is almost impossible to predict exactly what will be the "straw that breaks the camel's back", he believes it will likely be caused by one of the following three things: an ongoing trade war, the Federal Reserve raising interest rates too quickly, or excessive corporate debt levels. That said, we still have another year of solid growth ahead of us, so it's more important to focus on 2019 for now.
THE U.S. HOUSING MARKET
EXISTING HOME SALES
This paper is being written well before the year-end numbers come out, but we can expect 2018 home sales will be about 3.5% lower than the prior year. Sales started to slow last spring as we breached affordability limits and more homes came on the market. In 2019, Gardner anticipates that home sales will rebound modestly and rise by 1.9% to a little over 5.4 million units.
EXISTING HOME PRICES
We will likely end 2018 with a median home price of about $260,000 - up 5.4% from 2017. In 2019, prices are expected to continue rising, but at a slower rate as we move toward a more balanced housing market. Gardner forecasts the median home price to increase by 4.4% as rising mortgage rates continue to act as a headwind to home price growth.
NEW HOME SALES
In a somewhat similar manner to existing home sales, new home sales started to slow in the spring of 2018, but the overall trend has been positive since 2011. We can expect that to continue in 2019 with sales increasing by 6.9% to 695,000 units - the highest level seen since 2007.
That being said, the level of new construction remains well below the long-term average. Builders continue to struggle with land, labor, and material costs, and this is an issue that is not likely to be solved in 2019. Furthermore, these constraints are forcing developers to primarily build higher-priced homes, which does little to meet the substantial demand by first-time buyers.
MORTGAGE RATES
In last year's forecast Gardner suggested that 5% interest rates would be a 2019 story, not a 2018 story. This prediction has proven accurate with the average 30-year conforming rates measured at 4.87% in November, and highly unlikely to breach the 5% barrier before the end of the year.
In 2019, he expects interest rates to continue trending higher, but we may see periods of modest contraction or leveling. We will likely end the year with the 30-year fixed rate at around 5.7%, which means that 6% interest rates are more apt to be a 2020 story.
Gardner also believes that non-conforming (or jumbo) rates will remain remarkably competitive. Banks appear to be comfortable with the risk and ultimately, the return, that this product offers, so expect jumbo loan yields to track conforming loans quite closely.
CONCLUSIONS
There are still voices out there that seem to suggest the housing market is headed for calamity and that another housing bubble is forming, or in some cases, is already deflating. In all the data that was reviewed, Gardner states he just doesn't see this happening. Credit quality for new mortgage holders remains very high and the median down payment (as a percentage of home price) is at its highest level since 2004.
That is not to say that there aren't several markets around the country that are overpriced, but just because a market is overvalued, does not mean that a bubble is in place. It simply means that forward price growth in these markets will be lower to allow income levels to rise sufficiently.
Finally, if there is a big story for 2019, Gardner believes it will be the ongoing resurgence of first-time buyers. While these buyers face challenges regarding student debt and the ability to save for a down payment, they are definitely on the comeback and likely to purchase more homes next year than any other buyer demographic.