Will Home Prices Continue to Rise in 2018?
If you’re thinking of buying or selling a home in 2018, you should know what to expect the housing markets will look like next spring.
Not long ago, before the housing boom and bust, forecasting housing markets was a relatively easy matter for most economists. Real estate prices were a matter of supply and demand. As supplies increase, prices decline. As demand increases, prices rise. Mortgage interest rates, income levels and demographic factors all impact housing demand, and economists can forecast it.
Lately, that formula hasn’t worked very well. The healthier economy is providing better incomes, and millennials are ready to buy their first homes. Mortgage rates remain relatively low, so demand should be high, and therefore prices will rise. However, over the past three years, demand has not been as healthy as anticipated. Many potential young buyers are saddled with student loan debt and cannot afford a mortgage. Rents have been rising as fast as home prices, making it hard for renters to save for a down payment.
Appreciation rates rose sharply in 2013 and have continued to increase at a rate of 5 to 7 percent a year. In light of weakening demand, the experts expected price increases would start to slow down. Appreciation rates rose about 6 percent in 2015, so housing economists, including those that work for the nation’s leading real estate organizations, predicted the price increases would slow down this year (see table below).
Four out of five were wrong. Rates in 2017 have increased at about the same rate as in 2016. Once again, the forecasters are predicting that 2018 will be the year that appreciation rates change direction. Will they be right this time?
The factor that affected this year’s forecast had nothing to do with demand. Instead, the problem was on the supply side of the equation. For at least the third year in a row, supplies of homes for sale have been at least 10 percent lower than the previous year; in 2017, about one-third fewer properties were listed for sale than in 2014. As demand has softened, supply has declined even more.
At least six factors are causing the drought:
- New home construction has not kept up with demand. Home builders were devastated by the housing crash and now are suffering from shortages of supplies and skilled labor.
- About one-quarter of all retirees are staying in their homes rather than selling them. These are Boomers, the generation second only to millennials in size.
- Move-up buyers are not moving up because they can’t find a larger home that they can afford. This “Catch-22” problem is extraordinarily difficult to solve.
- Home prices are just now returning to their peaks since 2006. Owners who bought at the height of the housing boom are finally in the black. After a long decade, their houses are worth more than what the paid for them, and they want to make a little more.
- During the housing crash, six million or more homes went into foreclosure. About four million were converted in rentals. With rents booming, not many landlords want to sell.
- For these reasons and others, people are staying longer in the homes they own. The average homeowner’s tenure has risen from eight to ten years. People who buy homes today say they expect to stay in them at least 15 years.
Again this year, the forecasters are predicting prices will rise more slowly in 2018. The inventory shortage got so intense this year that thousands of first-time buyers gave up because they couldn’t find homes to buy. Young buyers will continue to be frozen out of homeownership until either income rises or prices settle down.
What do you think? Will prices finally slow down in 2018 as forecasted, or not? Pay attention to real estate market reports for December and January. If inventory levels are still lower than the previous year, housing markets will already be in trouble by the time spring markets open.
Remember that all real estate is local. Every market is different, and yours may not follow these national trends. Inventory shortages are higher on the East and West Coasts and in the suburbs rather than in rural markets.