Concern seized the U.S. housing market in late 2018, prompting discussion about an impending slowdown, a recession even. After home prices skyrocketed earlier in the year, the back half of last year ushered a softening that invoked comparisons to the real estate crash of a decade ago. Yet by the onset of 2019, anxiety seemed to have thawed as the billowing headwinds failed to topple the market.
“The U.S. real estate market looks like it is on solid ground” this year, says Ralph McLaughlin, deputy chief economist at business intelligence firm CoreLogic.
Another housing market crisis is unlikely in the immediate future, primarily because the trouble-prompting factors of the mid-2000s aren't present today. In the pre-bust period, subprime loans stirred up demand and hurled the market into overdrive, whereas today, tight supply reigns, coupled with stern mortgage requirements.
This peculiarity, however, spawns its own issues. High home prices and low inventory, which dominated 2018, erode affordability that further suffers when mortgage rates spike. Such “pain points,” McLaughlin says, often fester rather gradually, as the real estate market moves slowly compared to the stock market.
Even with a slow-moving market, certain industry indicators offer a prognosis to buyers, sellers and investors alike. Several such gauges, when measured collectively, could measure the vitality of mostly any housing market under nearly any economic condition.
[Read: The Guide to Buying a Home]
Here are the indicators you should keep an eye on to better understand the future of the housing market:
- Home prices
- Home sale volume
- Available housing inventory
- Mortgage rates
National resale value for all housing kinds neared $254,000 in December 2018, swelling by 3 percent from 2017, according to the National Association of Realtors.
“Home prices are reaching all-time highs with each passing month,” says Lawrance Yun, chief economist for NAR.
Alongside a national trajectory, home prices, like most economic indicators, chart independent tracks in regional markets, creating unique micro characteristics. While every state logged value increases in 2018, some – like Idaho and Nevada – experienced the largest upswings, according to the Federal Housing Finance Agency House Price Index. Others, like North Dakota and Connecticut, hardly saw a 1 percent growth in the FHFA House Price Index.
The distinction between national and local trends reveals differences in the overall performance of the U.S. housing market.
“Some places had prices that really went up during the boom in the early part of (the) 2000s and then seriously went down in the bust,” says Kurt Usowski, deputy assistant secretary for economic affairs at the U.S. Department of Housing and Urban Development. “(In other places, prices) went up some but didn't fall as much. Most places have recovered their house prices from before the housing bust.”
When comparing long-term price changes, however, the nuances between seasonally adjusted and unadjusted numbers could distort conclusions. Unadjusted values in seasonal shifts, such as winter slumps, could imply a market downturn when it's simply a part of the annual cycle. Hence, McLaughlin advises to contrast any value data with those of a year earlier, rather than the prior term.
“It is the same as the leaves falling off the tree – it doesn't mean that the tree is dying,” McLaughlin says. “It will come back in the spring.”
Soaring home prices usually dampen sale volumes. In January 2019, citing its latest data, NAR recorded about a 1 percent monthly decrease in the number of sales, which, nationally, totaled roughly 5 million transactions. Year-over-year, the drop is 8.5 percent, with the greatest decline in sale volume occurring in homes that sold for $250,000 or less.
“In the past, when housing went down for a long period, then it dropped the rest of the economy down,” Yun says. “But when housing retreats only for a short period and recovered, then the economy is fine.”
With positive job growth and mortgage rate reductions, sales – which usually peak in spring and summer – may improve.
As you read about home sales, be sure to note if the data is based on all sales, existing sales or new home sales. As a reflection of only new construction properties, new home sales capture an exclusive segment with higher prices and can mean different things for the local market.
“New-home sales are a very small part of the market, generally less than 10 percent,” Yun says. “Sometimes it can be as low as 6 or 7 percent of all transactions.”
Residential construction, reported by the U.S. Census Bureau and HUD, offers a barometer for future supply. More than 1 million housing units reached completion in 2018, or over 2 percent more than the 2017 tally, according to the U.S. Census Bureau.
The year-over-year boost obscures labor shortages and material-cost surges, some of which emanate from the Great Recession, when construction halted and the industry shrunk overall. “A lot of the builders who had land inventory might have had to liquidate some of that in order to maintain their cash flow during the recession when they weren't selling very many houses,” Usowski says.
The quantity of homes for sale hinges on disparate factors. Recently escalating prices, for instance, surpassed the means of many potential buyers, especially first-time homebuyers, letting the number of available homes rise.
In December 2018, new home inventory – at 344,000 – accounted for a six-month supply, according to HUD information. Existing housing shaped a harder market with 1.59 million properties, a pace that kept less than four months of inventory on the market. This, though, is better than earlier in 2018.
“The spring of last year was one of the tightest market conditions – just not enough homes for sale,” Yun says. “(S)ome loosening in the inventory is a welcoming sign.”
Today's still modest inventory counters the boon that defined the mid-2000s. There are various explanations why stock has hovered at historic lows ever since. Construction is consistently down. Owners, according to NAR's Profile of Home Buyers and Sellers, live in their homes for nearly a decade, several years longer than prior to the 2008 bust.
After reaching a nearly eight-year high in December, at 4.55 percent, mortgage interest rates are now sliding, forging a more favorable financial outlook for buyers.
“The Federal Reserve has changed its policy from December to indicate it is going to be patient and the way to read that is to say that the Federal Reserve will not raise interest rates in 2019,” Yun says. “Hence, just change in that tone has led to a fall in mortgage rates.”
Mortgages also shift with the appetite for 10-year Treasury bonds. When risk grows, investors prefer safe, government-issued securities. As a result, prices shoot up and interest, including mortgage rates, goes down.
“Mortgage rates really start to fall – that is typically because investors are pulling their money out of other investments and putting them into bonds because they are worried about the market,” McLaughlin says.
The More, the Better
While home prices, sales, construction, stock and mortgage rates are all essential indicators for the real estate market, others also harbor insights. Household-formation and homeownership rates reveal prospective demand. So do job creation and wage growth. Student debt, which could affect purchasing power, is another useful metric, alongside buyers' changing preferences.
On the supply side, trade deals and building regulations impact construction, while financial and personal matters may motivate sellers.
Thus, no single indicator could divulge the complex entirety of the housing market. Rather, it is a constellation of many.
Are these must-haves on your list?
One of the first steps you take when deciding you want a new home is determining what you need in order to be happy there. The list of your must-haves can get long, and you reasonably can’t expect to find a house that perfectly matches all your criteria. “Someone has a list of 10 things – if they can find a house that has seven or eight of those, they’re doing pretty good,” says Jeff Plotkin, a Texas-licensed Realtor, attorney, certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas. Deciding what needs win out in your next home search can be tough, but there are a few key features and amenities many buyers seem unwilling to live without.Right in your price range
Right in your price range
Being able to afford your new home is a given, but buyers are often faced with having to choose between stretching their budget to have the master suite they want or having more reasonable monthly mortgage payments. Price often wins out in the end – you’re less likely to enjoy that master suite if you’re eating soup and foregoing vacations for the next five to 10 years to pay it off. In the 2018 National Association of Realtors Home Buyer and Seller Generational Trends report, home affordability was one of the three most important factors for respondents who recently purchased a home – behind only quality of the neighborhood and a location's convenience to work.In your preferred location
In your preferred location
Homebuyers care a lot about being able to get from point A to point B – as well as points C, D and E. Your future neighborhood can dictate what school your kids go to, how long it takes to get to work and how easy it is to stop at the grocery store when you forgot an ingredient for dinner. Plotkin says buyers put a lot of stress on where the house is, rather than what’s in the house itself. They’re looking for “proximity to schools, shopping, entertainment, public transportation,” he says.Interior over curb appeal
Interior over curb appeal
A handsome exterior keeps potential buyers from quickly driving away, but insight from new construction marketing site HomLuv.com reveals that it’s the interior that most often serves as the deal-maker. HomLuv’s website allows homebuyers to begin their search for a new home from the room they care about most, whether that’s the kitchen, living room or master bathroom. The one part of the house people don’t seem too worried about? Outside. In the roughly two months since HomLuv launched, “no one has chosen to look at exteriors first,” says Mark Law, vice president of product management for BDX, a home builder marketing company and parent company of HomLuv.The right number of bedrooms
The right number of bedrooms
While the interior of the home allows more wiggle room to compromise on your needs, there are some details that buyers must have. The right number of bedrooms would be the big one. Family expansion is often a primary reason homeowners start looking for a new house, so leaving out that extra room would defeat the entire purpose of the sale. According to the NAR report, 85 percent of homes purchased by respondents in 2017 had three bedrooms or more.Window treatments for reference
Window treatments for reference
Staging matters in a home. As much as we think we can picture how a vacant house will look with our own furnishings and decor, at the end of the day we need some suggestions. Law says builders will include big picture windows in bedrooms or over the tub in a master bathroom to let in natural light, but if the photos show the space without curtains or blinds, house hunters will inevitably see a design flaw. “They’ll say, ‘I’m not an exhibitionist,’” he explains. To avoid turning homebuyers off, window treatments should be included in listing photos and for home tours.Move-in ready
The condition of the home you shop for often goes hand in hand with your budget and the neighborhood you hope to live in. If your budget is at the lower end of the price range in the hottest community in town, you’ll likely find yourself buying a house that needs a little love. If your budget doesn’t restrict it, chances are you’ll have your pick of properties that have been turned by real estate investors. “The [buyer] demand is for 100 percent move-in ready condition,” says Bobby Montagne, CEO of Walnut Street Finance, a private money lender focused on home flipping in markets in Virginia, North Carolina and the District of Columbia metro area.Possible to picture your vision
Possible to picture your vision
Even if you’re one of the detractors who prefers a fixer-upper, it’s still necessary to be able to envision how the space will look once you’ve added your personal touches. Based on reactions from HomLuv users, details as small as the cabinet color in a photo can change the way a person thinks about a house. Law says he’s found preferences differ from region to region – darker cabinets may see more love in the South, while in California the preference is for white kitchen cabinets. “You could offer a free puppy and free pots and pans with the house, but if the cabinets are dark they still don’t want it,” he says.Warranty available
For newly built homes and those that have been recently flipped with significant work, you want to know that the professionals involved stand by their work. New construction homes often come with a warranty from the builder or the option to get a third-party warranty, and you should ask the investors involved with a flip for the same level of protection. “A good builder [or] a good flipper does not have a problem with that,” Montagne says. If an issue arises within the life of the warranty related to the workmanship, you can rest easy knowing you’re covered financially for the repairs.Potential for value growth
Potential for value growth
Your home isn’t just where you’ll live – it’s also an investment. There are a few easy decisions you can make that reduce the chances of losing out on potential growth in value over time, whether that means buying in a neighborhood where home values are steadily growing, finding a home in a desirable school district or avoiding living next to a strip mall. “When you’re buying a house, you’re not only buying it for yourself, you’re buying it for resale,” Plotkin says. “So most people are not going to want to back up to commercial [property] or a busy road.”Read More
Devon Thorsby | June 5, 2019
Homeowners should not fret, as long as they're prepared for the possibility of a downturn.