Things Are Looking Up for Home Buyers, But Will It Last?

by Steve CookNovember 6, 2018

After four years of soaring prices and inventories so slim that thousands of prospective buyers looking for an affordable home have been forced to delay their plans, times are improving in the housing market.

As 2018 winds down, it’s clear to leading housing economists that price increases will continue to flatten out, though prices still rose over five percent and inventories of homes for sale are no longer declining in most market. They are ending the year about where they were in 2017.

Tract homes in new subdivision in North American suburban residential neighborhood.

Long term trends in the real estate economy seem to be changing direction. If those trends continue to increase inventories and slow price gains to four percent or less in 2019, it may be the best year for buyers since the housing recovery began.

An uptick in the national home ownership rate that began in 2017 and is driven by young buyers may be a harbinger of change. Yet tor many potential first-time buyers, these changes won’t go far enough in 2019 to make enough of a difference. Prices will continue rise during the year, but not at the pace of the last three years. Supplies of homes for sale will grow, but not quickly enough to make up for the three-year inventory drought. Inadequate supplies of affordable starter homes will continue, especially in expensive markets.

a chart of the existing home sales median price changes year-over-year. Prices have gradually fallen since January 2018

Fannie and Freddie economists see prices leveling off

The housing economists at Fannie Mae and Freddie Mac are some of the best in the business. For two years, they have predicted that the rate of price increases will fall after reaching 7-8 percent a year, an extraordinary rate for housing. Now they are next expecting rates in the 4-5 percent range. If current trends continue, prices should soon reach three percent a year, considered by many to be a typical appreciation rate for housing.


Median price increases
for existing homes
2017 2018 2019
Fannie Mae 7.9% 5.1% 4.3%
Freddie Mac 7.2% 5.5% 4.5%

via Fannie Mae and Freddie Mac. Bold cells are forecasts.

Inventories are the key

Real estate markets follow the law of supply and demand. Driving the slowing of price increases is a long-awaited rebound of inventories. The four-year drought in supplies of homes for sale is finally ending. In May, inventories increased on a monthly basis and continued to rise over the summer. See our article about the housing market and whether a change is underway.

In September, for the first time in nearly three years, the number of homes for sale increased on a year over year basis.At 1.86 million homes, the nation’s total housing inventory was greater than a year ago. Inventory was up to 4.4 months of supply in September, slightly above the 4.2 months of supply reported in September 2017.

Rising prices and lowest level of affordability in ten years have kept millions of potential homeowners renting. Yet those very factors are now changing the dynamics in markets across the nation. Higher prices and the knowledge that they won’t keep rising at 7 percent a year forever are motivating more sellers to list their homes. New listings are stabilizing inventories and reducing pressure on prices. The nation’s most expensive markets―Seattle, San Jose and Boston―are leading the inventory recovery.

NAR home affordability index. A lack of affordability is keeping young buyers out of the housing market.

“There is a clear shift in the market with another month of rising inventory on a year over year basis, though seasonal factors are leading to a third straight month of declining inventory,” said NAR’s Lawrence Yun. “Homes will take a bit longer to sell compared to the super-heated fast pace seen earlier this year.”

Change slower for less expensive homes

The slice of the market that needs relief more than any other is last in line to restore inventories and see prices soften. Unfortunately, inventories are rising fastest at the high end of the price spectrum. Many luxury markets never felt the inventory drought. Builders are building more homes in the mid-to-upper income brackets because they are more profitable. Few affordable entry-level homes are being built and until the broken rungs in the housing ladder are fixed, move-up buyers aren’t going to list their homes.

Not all trends are positive. First-time buyers still confront higher down payments due to higher prices. Mortgage rates are now around five percent and are expected to keep rising gradually. Slow wage growth among younger workers is making it hard for many to qualify for a mortgage.

Starter homes are at their highest prices since 2008, Bloomberg recently reported. In the second quarter, first-time buyers needed nearly 23 percent of their income to afford a typical entry-level home — up from 21 percent a year earlier. How long will it take for the change in the market to make its way all the way down to the first-timers?

Some observers believe that the changes in today’s real estate markets helpful to young buyers are temporary, simply another cycle in the famously cyclical housing economy. “The growth in income can somewhat taper the impact of rising mortgage rates, because if the economy is growing well, then it’s also generating income growth that will help buyers sustain the increased costs of purchasing a home. But, if inflation rises because of geopolitical factors or a rise in energy costs, then the economy, as well as the housing market could face a problem,” says Sam Khater, chief economist at Freddie Mac.

Inventories are still far from healthy. Prices will certainly rise four percent or more next year and only another recession will drive prices lower. Will those prices prove to be a barrier too high to scale for all but a few young families? Mortgage rates rising to levels from which they will not retreat, regulators forcing lenders to tightening credit, down turn in the economy or a host of other events could torpedo the fragile formation of buyer-friendly real estate markets.

By mid-year of 2019, we should know if the forces that are replenishing local markets and moderating prices will stay on track. If inventories of mid-priced homes keep growing, prices might continue to level off by mid-year. Buyers should monitor their local markets carefully and look for improvements in supplies of homes for sale, lower price increases and even price reductions. A good metric to track is the ratio of list price to sale price. If that gap widens, it’s a sign that prices are softening.

For buyers, 2019 may be the year that their local market change direction and 2020 might be the year markets return to a better balance and open up opportunities for first-time buyers. Change is in the wind.

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About The Author
Steve Cook
Steve Cook is editor and co-publisher of Real Estate Economy Watch. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.