After 10 years of economic prosperity, the US residential real estate market is now at a pivotal inflection point. Interest rates are on the rise, tariffs are driving up construction prices and demand is flatlining. Yet home sale prices are still going up, and new technology is expanding access and improving affordability in the market.
What do these changes mean for the overall growth of the market in 2019 and beyond? This article explores key trends we see in this regard, including a bull market continuing despite mixed messages from industry insiders, strong activity in the market from Millennials, and macroeconomic and political factors that are noteworthy but not strong enough to topple the market.
In the midst of mixed messaging among top industry leaders and companies, I remain bullish that the US residential real estate market will continue to grow in 2019.
While the market may not expand at the same rate as it has in recent years, the trajectory still looks to be moving upward. Specifically, from 2009-17, aggregate transaction value for homes sold in the US increased at a compound annual growth rate (CAGR) of approximately 7%, reaching over $1.8 trillion. In 2019, aggregate transaction value appears likely to reach just shy of $2 trillion, with a CAGR of 4% from 2017-19.
Home sales look to remain on an upward trajectory through 2019
My bullish outlook primarily stems from a price increase trend that’s strong enough to counter tempered demand. Across the US, home prices are growing steadily, with a CAGR of 3.8% since 2009. Going forward, Home Bay remains optimistic that median selling prices will accelerate further. Specifically, based on data from the US Census Bureau and the National Association of Realtors (NAR), the forecasted CAGR for 2017-2019 sits at 4.7%.
This growth has particularly been fueled by rising prices in the West and South, and certain markets such as Dallas and San Francisco appear likely to continue to see an increase in selling prices. However, housing prices in the West and South may not grow quite as quickly as in recent years, whereas the Northeast and Midwest could see an uptick in growth rates.
Together, these trends support my optimism that the overall market will be able to handle challenges such as rising inventory levels and fairly flat demand.
Inventory of “for-sale” homes jumped from 1.8 million in 2017 to 2.2 million in 2018, and this number should grow in 2019, particularly as newly-built homes are added to the market, according to the US Census Bureau and NAR. In fact, housing starts grew significantly from 2014-17 at a CAGR of 7%. Although construction may not continue at quite the same pace, housing starts are still forecasted to have a CAGR of 2% from 2017-20, based on data from the National Association of Home Builders (NAHB).
Yet demand has been somewhat lagging. The forecasted final 2018 numbers indicate an approximately 1.9% demand dip from 2017 to 2018. This drop occurred in all regions but particularly in the West and Northeast. Going forward, demand should recover a bit in 2019, so CAGR from 2017-19 should essentially be flat, according to the US Census Bureau and NAR.
Despite these mixed signals and mixed forecasts from industry insiders, I’m optimistic that housing prices will remain strong, and there will be enough demand for the overall value of sales to still rise in 2019.
Despite perceptions of Millennials being a generation of renters, this generation provides key support for the US residential real estate market, and their activity gives Home Bay optimism that the sector will continue to grow.
In fact, Millennials (37-years-old or younger as of 2018) comprise the largest segment of homebuyers. From 2014-17, their share increased from 32% to 36%, while Older Boomers (63-71) fell from 15% to 14%, and the Silent Generation (72-92) dropped from a 10% to 6% share during that time, finds NAR.
Share of Millennial home buyers is on the rise
And Millennials are more than just first-time homebuyers. They’re also a growing share of sellers, increasing from 15% of all sellers in 2014 to 20% in 2017. This generation also creates more turnover in the market: Millennials have the shortest expected tenure—a median of 10 years—in the homes that they purchased, compared with a 20-year average tenure for 53-62-year olds, according to NAR.
Moreover, a 2017 survey by Realtor.com found that Millennials are far more likely than other generations to sell their homes in the next year. Specifically, 49% of 18-34-year-olds said they plan to sell, compared with only 8% of those 55+.
Plus, Millennials drive demand for larger homes. The median square footage of homes sold by those 37-years-old and younger is 1,600, yet this age group then purchases on average a 2,300-square-foot home, finds NAR.
Thus, Millennials provide both an important source of demand for real estate while also helping to keep inventory fresh, thereby supporting overall market growth.
Rising above economic and political headwinds
A variety of macroeconomic and political factors contribute to uncertainty in the real estate market, but despite their potential dampening effects, I still foresee the market forging ahead.
For example, rising interest rates tend to increase mortgage rates, thereby making home-buying affordability more challenging. Yet based on the market’s reaction to previous rate increases and consumer sentiment surveys, buyers do not seem likely to be overly deterred.
Specifically, The Federal Reserve expects to increase the federal funds rate (the benchmark from which other interest rates are set) twice more in 2019 to reach approximately 3.0%. Thus, the average 30-year-fixed mortgage could reach around 5.5% by the end of the year, notes Redfin. While higher mortgage rates can discourage some individuals from taking out a loan to buy a house or start new construction, over the past 30 years, the six periods of significant interest rate hikes did not see growth tempered enough to cause aggregate sales to dip.
In this current period of rising rates, estimates by Freddie Mac indicate that the increases will slow down home price appreciation and mortgage originations. Yet the drop in originations is mainly due to a slowdown in refinancing; mortgages for newly purchased homes are still projected to grow ~4% per year into 2020.
These projections align with a recent consumer sentiment survey by Redfin, where about one-third of consumers said they would slow their search if interest rates were to rise above 5%, but the overall impact on home-buying plans would not change significantly.
Mortgage rates above 5% may slow down searches but unlikely to derail the market
Moreover, Fannie Mae and Freddie Mac have loosened credit restrictions over the past few years. While borrowing may not be as lax as it was pre-financial crisis, access to credit over the next two years should counter some of the effects of rising rates.
In addition to interest rates, the real estate market also faces challenges such as tariffs. These taxes on imported materials affect construction, which can thereby drive up housing prices. For example, in April 2017, the US started imposing a ~20% tariff on imported Canadian lumber. Considering that Canadian lumber accounts for 40% of US lumber imports, the tariff affects the cost of building a home by over $7,000 on average for a single-family home, according to NAHB.
In addition, the US recently started imposing a 10% tariff on a variety of Chinese imports, such as cement, granite, ceramic tiles, iron, steel and other building materials. Thus, affordability could become even more challenging, thereby limiting demand. Yet rising new home prices do support aggregate growth in the market, which contributes to my bullish outlook.
Technology can also help counter some of these headwinds and contribute to a healthy real estate market. Full-service digital brokerages, discount service providers, iBuyers and other digital tools and platforms provide buyers and sellers with broader and more efficient access to the real estate market. Similar to how the advent of ATMs allowed banks to improve efficiency and open more branches, and how digital finance tools can expand banking access to underserved communities, technological innovation in real estate can also expand the market. Moreover, technology can help buyers and sellers reduce commission costs, thereby countering affordability challenges brought on by factors such as rising interest rates and tariffs.
The Bottom Line
Overall, 2019 will likely include some challenges for the US residential real estate market, but even as a whole, these issues won’t bring the market to a halt. Instead, the market looks poised to continue to grow, driven largely by higher housing prices. And as Millennials continue to become a larger part of the market—often aided by digital tools and platforms—they will prop up demand and contribute to a healthy real estate environment.
2019 U.S. Real Estate Outlook
For a more in-depth look at our 2019 outlook for the U.S. real estate market, click here.
John Todd is CFO & COO of Home Bay Technologies. He has served at the executive level at several Fortune 500 companies and holds an MBA from College of William and Mary.
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