Whether you're looking to buy or sell a home in 2019 – or find the perfect rental – it helps to know what you're up against. In many markets, the trend of a low volume of homes on the market compared to the number of buyers that has been fueling bidding wars and rapid increases in home prices may losing steam, but rising interest rates may also cause more buyers and sellers to hold off on making a new deal.
Here’s what to expect from the housing market in 2019.
The most common topic of conversation for potential homebuyers and sellers going into the new year is about rising interest rates. Mortgage rates are at their highest mark since 2011, and while higher interest rates are a sign of a good economy – especially compared with historically low unemployment rates – the change has many consumers hesitating about jumping into the housing market.
The Federal Reserve hiked interest rates three times in 2018 – with a fourth likely before the new year – and has also expressed plans to increase them more than once in 2019. While mortgage rates set by lenders are not beholden to the Fed’s set rate, they do often echo changes in the long run.
A marginally higher interest rate doesn’t necessarily add a significant amount to the total you pay back to a lender for your mortgage, but in monthly payments you could see anywhere from a change of $50 to “a couple hundred dollar increase, and that can make a huge bit of a difference,” says Jim Murrett, president of the Appraisal Institute.
As a result, some consumers are stepping back from the market, which is slowing the rise in home prices and increasing the number of days homes are on the market. “That higher cost (from interest) is really driving some of the weakness you’re seeing in the housing market,” says Tian Liu, chief economist for Genworth Mortgage Insurance.
[Read: The Guide for First-Time Homebuyers.]
While the vast majority of homebuyers aren’t pushed out of the range to purchase a house with the slight increases in mortgage rates, some could see the addition of $100 to their monthly housing payments as a hindrance. And there are more potential buyers who don’t necessarily have the affordability issue, but they don’t like to take a chance of home values dropping or being unable to afford payments, explains John Pataky, executive vice president and chief consumer and commercial banking executive at TIAA bank.
“They might be able to afford it, but they elect not to because they feel it might be a little bit of a risk they’re not willing to take,” Pataky says.
The decline in active buyers will likely lead to a slowing growth of home prices across the U.S. While prices have outpaced wage growth in many major markets for the last few years, that growth will continue to slow and possibly flatline in a couple areas, particularly in smaller metro areas where price growth hasn't been as quick.
“In the better markets … it’s going to continue to grow, but not as fast as it did before,” says Nick Ron, CEO of House Buyers of America.
Homeowners looking to sell their property may be hesitant to put their home on the market because that also means purchasing a new house, which more often than not requires a brand-new mortgage and more current interest rate. As a result, consumers can expect continued low inventory of houses on the market while buyers and sellers try to adjust to new rates.
Instead of selling, homeowners will continue to build equity as they make monthly payments on their existing mortgage and improve the property to increase its value, which will allow them to see greater profits when they decide to sell.
Home sellers are also seeing growing number of alternatives to placing their home on the market. The last few years have seen growth in the number of iBuyers and similar investment companies that specialize in quick cash purchases of properties to renovate and resell them. Rather than listing their home with a broker, homeowners can contact companies such as House Buyers of America, Opendoor and OfferPad to sell the house directly. Similar platforms are debuting where larger companies facilitate the transaction by teaming up with local investors who make the purchase and renovate.
While it’s unlikely that this platform will completely replace the traditional home selling process or the need for real estate agents, it’s becoming a popular option for sellers looking for a solution that better fits their situation and preferences. Ron notes that House Buyers of America was founded in 2001, so it’s been through different housing market cycles, and different needs for homeowners arise at different times.
In a market where demand is lessening, sellers may find that selling to a company rather than an individual buyer will make the process quicker and help them avoid issues, although the sale price is often less than what the house would sell for if placed on the market. But even when the market is hot and buyers are scrambling to make an offer, there will always be sellers who prefer an alternative to listing their property, Ron says. “People are looking for a hassle-free way to sell their home,” he says.
New Construction and Development
Residential construction has been slowly rising in the years following the recession when construction came to a standstill, but housing starts still aren’t on pace to meet demand. The slow rate of new construction has contributed to rapidly rising prices in the last few years, particularly because most new construction has focused on high-end luxury homes.
“There really hasn’t been an expansion of affordable housing supply,” Liu says.
The start of 2018 saw a 10-year high for housing starts – the point when construction begins on a property – with more than 1.33 million housing units started in January nationwide, according to the U.S. Census Bureau.
Housing starts for the rest of 2018 haven’t reached past the January peak, however, and it’s possible interest rate increases are also restricting the construction industry. Developers and construction companies often rely on loans to complete projects, and with higher interest rates and less demand due to wary buyers, it’s possible construction won’t continue at the rate it needs to in order to keep up with new household formation.
There is a silver lining to a construction shortage, however: The housing market avoids a construction glut that overproduces, which can cause problems in a future economic downturn. “Normally you have an oversupply (of properties) – that’s what happened in the last crash,” Ron says.
Without an oversupply of housing and new construction, consumers have less to fear about housing prices in a future recession. Instead, the next recession would likely cause a dip in home values when unemployment rises, but the housing market would be able to recover much quicker.
Would-be first-time buyers who are apprehensive about mortgage rates or home prices may choose to stick to renting. In some markets, this could keep landlords happy without having to worry about increased vacancy due to lower demand.
But on the whole, renters benefit from declining rental demand. The U.S. Census Bureau reports the nationwide homeownership rate is 64.4 percent as of the third quarter of 2018, a consistent increase since homeownership rates reached 50-year lows – below 63 percent – in 2016.
“Almost all of the increase in household formation has come from owner-occupied housing,” Liu says.
Rising homeownership rates are good for renters, who have fewer fellow renters to compete with and may have more bargaining power when it comes to gross rent, concessions, free months’ rent or better amenities.
Rising income and low unemployment rates also give renters another step up. In a report from rental housing information site RENTCafé released in November, affordability of rental housing has increased significantly since the recession. In 2017, renters making the median income could afford 49 percent of all rentals in the U.S., compared to just 38 percent in 2011.
Like homeowners, renters should continue to save as much as possible while wages are up and the job market is strong in preparation for a time when affordability declines to ensure rent can be made on time in the more distant future.
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
Updated on Dec. 7, 2018: This story was originally published on Dec. 13, 2017, and has been updated with new information.
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at firstname.lastname@example.org.
Devon Thorsby | June 5, 2019
Homeowners should not fret, as long as they're prepared for the possibility of a downturn.