Forecast on the Year to Come: Can 2018 Compete?
With top economists like Freddie Mac’s Leonard Kiefer calling the past year “the best housing market in a decade,” how can 2018 compete?
While 2017 exceeded expectations in the two most important categories, sales and prices, it had its weaknesses. Now that the results are in, here’s a quick review of 2017’s accomplishments and disappointments.
2017: Great for sellers, not so great for buyers
Home sales increased by 1.1 percent in 2017 to a 5.51 million sales pace and surpassed 2016 (5.45 million) as the highest since 2006 (6.48 million). NAR’s chief economist Lawrence Yun noted that market conditions were far from perfect and sales would have been even better if more affordable properties had been available.
Prices in December increased 5.8 percent, rising for the 70th straight month−good news for owners but bad news for buyers as fast-rising prices and disappearing supplies pushed affordability to crisis levels in hotter markets. Inventories of homes for sale was 10.3 percent lower than a year ago, and unsold inventory ended the year at the lowest level since NAR began tracking it in 1999.
At 63.9 percent, the nation’s homeownership rate remained statistically unchanged during the year, only seven basis points above its all-time low in the second quarter of 2016. The year was not so good for young buyers. Millennials’ homeownership rate ended the year slightly higher than its all-time low and despite the size of the millennial generation and the improving economy, first-time buyers’ market share of purchases was lower than normal.
2018: Crystal ball gazing
Forecasting the real estate economy is a bit like forecasting the weather. Like the weather, real estate is highly localized. Conditions in one market may differ from others based on geography, local economies, and a dozen other factors. Many real estate trends are created by national conditions such as mortgage interest rates, income, employment trends, and changing demographics.
This year, forecasting is even more difficult than normal because many of markets continue to experience fundamental issues. Will incomes finally meet expectations? Will interest rates rise enough to discourage demand? Will the tax cut help or hurt homeowners? Most of all, will supply of homes-for-sale improve? The inventory drought is driving up prices and curtailing sales in many markets. Many factors are causing the drought, from problems affecting the production of new homes to the desire of more and more retirees to remain in their family homes. The sudden decline in listings that began three years ago caught the experts by surprise, and many don’t see a solution in sight next year.
With those caveats in mind, here’s a summary of how top economists view 2018.
- Home prices. Over the past three years, the national median home price has risen about 11 percent, and most of that growth came last year as shortages of homes for sale inflated home values, especially in hotter markets on the East and West Coasts, and Texas. Buyers can expect for prices to continue to rise but at a slightly slower pace than in 2017. After rising about 6 percent in 2017, most forecasts are calling for prices to increase 5 to 6 percent in 2018…but that could change if supplies remain critically low.
- Home sales. Sales ended up having a pretty good year in 2017, but not as good as many predicted. In the second half of the year, affordability issues hurt demand on the coast and among first-time buyers, who found themselves priced out of the market. As a result, 2017 sales were far below forecasts. Most economists don’t expect new home sales to improve enough next year to restore momentum to sales, so forecasts are calling for total home sales to increase only two to four percent next year.
- New homes. After a disappointing 2017, new home starts are forecast to rise eight to 10 percent next year.
- Interest rates. Rates in January were about 4.15 percent on a 30-year fixed rate mortgage, up from 4.09 percent a year ago and 3.09 percent two years ago. Most forecasters are expecting rates to end 2018 around 4.5 percent.
- First-time buyers. With no relief in sight to the debt and affordability issues plaguing first-timers, their share of sales is not expected to improve much over the current 32 percent, nor is the waning incentive provided by the mortgage interest deduction going to generate a turnaround in millennials’ low homeownership rate.
- Homeowners’ equity. Homeowner equity reached a new all-time high in 2017, but average annual gains for individual owns varied widely, from $12,000 to $40,000, based on location. Since equity is primarily a function of price trends, look for equity to continue increase in 2018, though not quite as quickly.
- Single-family rentals. Despite rising acquisition costs, investing in single-family rentals becomes more popular each year. Investors’ share of home purchases rose to 16 percent of sales in December, a 14 percent increase over 2017. Tight inventories of homes for sales are expected to keep purchase prices high for young buyers, keeping single-family rental occupancy rates healthy. Rising rents coupled with rising appreciation should offset higher acquisition costs over time.
As the new year begins, most economists see no dramatic changes on the horizon. Should that prove to be the case, 2018 could be a year when the real estate recovery catches its breath. A new sense of normalcy now makes it easier for sellers, buyers, and owners to adjust to the fundamental changes in housing markets over the past three years.