Will The Housing Market Crash in 2020?
Ask most investors what they think about the housing market today, and they will most likely cringe out of habit. The reality is that the US housing market in 2019 has made a recovery, a long and expected one.
The housing market in 2019 saw modest increases across the board, though there were hot spots in the market in terms of both geography and price ranges.
Housing market predictions in 2020 and beyond run the gamut from optimistic to pessimistic. For example, Zillow predicts that there will be a housing recession in 2020.
They blame monetary policy for this; the market has been expanding rapidly but is due for a correction. They also cite housing affordability or a lack thereof. That means the Millennials hitting the ideal age to buy their first home often can’t afford it or build it.
Nor are we going to see the masses of regulation that limit land use and drive up housing costs repealed any time soon. Minor tweaks to allow for accessory dwelling units (ADUs) or new denser multifamily housing units take years to achieve anything.
What does this mean for the housing market in 2020? We’ll see prices for affordable and starter homes continue to increase at near double digit rates while the general real estate market goes up at near or just above the rate of inflation.
Specific areas may appreciate or depreciate depending on inventory and demand. We can use the consumer’s demand for each generation to give us a housing market forecast for 2020 and beyond.
Let’s look at how the housing market performed in 2019 before predicting what will happen in 2020 and beyond. We’ll share some hard data for 2019 and give a reasonable housing market forecast for 2020 and the foreseeable future.
But before we get into why the US housing market is looking good for 2020, let’s remind ourselves how the housing market got such a bad rap in the first place, shall we?
As the twenty-first century came along, many people pounced on real estate as if it was going out of style. People snatched up acres upon acres of real estate, as is human nature, because you can never have too much of a good thing, right?
Wrong. In 2008 we all watched the bubble pop. We all looked on as years of badly thought-out policies, affordable housing acts, and an uninformed consumer base reached a bursting point, and burst in the faces of millions of people.
This was not just a contributing factor to the second largest recession in American history, but in the eyes of Americans everywhere, a sign of danger. The great housing market she giveth, and the great housing market she taketh away.
If there’s anything we should remember as a collective society, it’s that history always seems to repeat itself. From 1970-1990 the average cost of a home in America had quadrupled. To the average American, the US housing market was a great thing that seemed to keep getting better.
Everything has peaks and valleys, it rises and falls. And although the market was in shambles, it rose from the ashes.
As of right now, the Federal Reserve is keeping short-term rates near zero percent. This alone is great news for potential investors, let alone the fact that the Federal Reserve is also buying longer-term bonds and mortgage securities in the secondary market. This powerful tonic of reparative measures is keeping rates artificially low across the board.
In addition to this, banks are finally starting to loosen their standards for mortgages again, and while no-money-down loans have gone extinct, borrowers with decent credit are getting financed more easily.
Are These Mortgage Rates Good?
How about the fact that houses are an average 30% below their peak and in many cities, it’s less expensive to buy than to rent. Add to this that mortgage rates are still hovering near all-time lows and it’s no surprise that many home builders have reported that quarterly sales are up by thirty to forty percent.
Banks are not selling as many foreclosures as they used to, and cash investors are scooping up many homes and converting them to rentals. The cost of renting a home is going up as well, making buying a home seem like a more feasible option right now.
Current Housing Market Trends in 2019?
The housing market is seeing more new home construction. However, there is a market mismatch. We’re seeing more luxury properties hitting the market than there is demand for. This is because developers want to maximize the return on investment for the expensive material and labor costs.
This means there aren’t enough starter homes and trade-up properties relative to demand. This is why the cost of starter homes rose 12 percent last year, and trade-up homes appreciated nearly 8 percent. Yet there is significant demand for affordable housing.
Two-thirds of renters say they just can’t afford a home, and that’s understandable given that home prices are appreciating at twice the rate people’s wages are going up. Let’s look at some of the hard data on 2019 real estate trends.
Total housing starts increased by 1.6 percent in 2019. Multifamily housing starts fell by more than a quarter while new single-family home construction rose steadily. The decline in mortgage rates in 2018 and slower growth in home prices led to an increased demand for existing homes.
The number of existing-home sales was up 2.6 percent in 2019. A relative lack of inventory (a nearly 3 percent drop) caused homes to sell quickly. For example, nearly half of all homes sold in August 2019 were sold in less than a month.
After all, several percentage increases in available supply mean little once you know that we hit a record low number of homes on the market at the start of 2018.
What does this mean for home prices? The Case-Shiller National Home Price Index showed home prices going up roughly 3 percent in 2019. However, there were wildly different home prices trends depending on the local market. Phoenix and Tampa had nearly double-digit home price appreciation.
2020 Housing Market: What Will it Look Like?
The inflation of new home prices has slowed to something close to the rate of inflation. However, we shouldn’t expect housing prices to fall, since the cost of new construction is going up.
A lack of people in the skilled trades and increases in the minimum wage will increase the pay rates of those building homes. That’s aside from the steadily inflating material costs.
Baby Boomers continue to have a major impact on the housing market, though this is radically different to how older generations impacted housing markets in the past. Baby Boomers are much more likely to remain healthy and active in their old age.
This means they’re less likely to pass-away or sell the family home to a young family and move into assisted living. When the retiree decides to downsize, they may sell the 2500 square foot single family home, but they compete for a smaller starter home instead of moving into a retired adult community.
The divorce rate and broken families of the past few decades exacerbates things, too. Mom or Dad lives alone in the house instead of sharing it with their significant other. Housing demand is driven by the number of households, not the number of adults, so divorced and single individuals drive up demand for their own homes, too.
The sheer cost and inconvenience of moving has resulted in the average time people remain in one place to increase. In 2019, the average person remained in the same house for roughly eight years. For comparison, the average stay was only four years in 2007.
This results in less churn in the housing market and fewer available existing homes on the market. At the same time, Generation Xers were hard hit by the Great Recession. They’ve really only recovered since 2012.
This means that Generation Xers are much more likely to remain in the rental market than prior generations at that age. This drives up rental rates and eats into the rental supply. Yet this generation hasn’t abandoned the dream of owning a home, increasing demand for starter homes.
Housing Market Predictions 2020
Housing market predictions for 2020 and beyond run the gamut from optimistic to pessimistic. For example, Zillow predicts that there will be a housing recession in 2020. They blame monetary policy for this; the market has been expanding rapidly but is due for a correction.
They also cite housing affordability, or a lack thereof. That means the Millennials hitting the ideal age to buy their first home often can’t afford it or build it. Nor are we going to see the masses of regulation that limit land use and drive up housing costs repealed any time soon.
Minor tweaks to allow for accessory dwelling units (ADUs) or new denser multifamily housing units take years to achieve. While Millennials are painted as unwilling to settle down (and they are much more likely to rent than prior generations), they do account for a third of all new home buyers. They also account for nearly half of all mortgages.
We can expect them to continue to buy homes and condos at an increasing rate as they settle down and start families. They’re just more likely to buy a condo in a walkable community than a single-family house in the suburbs than Generation X.
Millennials are affecting the real estate market in other ways, too. They prioritize a low maintenance home with smart appliances and an energy-efficient design. If you can’t offer this, they’ll either lower the price or move on to something else.
They also prefer walkable communities over having to drive everywhere. They’ll pay a premium to be near public transit, too, since this can offset transportation costs. In short, they’ll pay a little more for a house or condo that lets them ditch a car.
What does this mean for our 2020 housing market forecast and beyond? Home prices will continue to rise slowly due to limited supply and demand, but homes that meet Millennial’s ideals and their budgets will continue to appreciate at double-digit rates.
When Will the Housing Bubble Burst?
Even though the housing market likely won’t be the cause of the next recession, an economic downturn would still have an impact on the US real estate sector. The housing market in the U.S. could enter a recession in under five years, with Zillow predicting that it will occur in 2020.
The spillover to the housing market will rely upon the profundity, length, and severity of the 2020 recession and, if some parts of the country feel the effect worse than others, some local housing markets could see greater effects.
“The current economic expansion is getting long in the tooth by historical standards, and more late-cycle signs are emerging,” said Scott Anderson, chief economist at Bank of the West, who was among those predicting a 2020 recession.
According to a survey published by WSJ, some 59% of private-sector economists surveyed in recent days said the economic expansion that began in mid-2009 was most likely to end in 2020. An additional 22% selected 2021, and smaller camps predicted the next recession would arrive the following year, in 2022 or at some unspecified later date.
In a research report in which Zillow surveyed 100 real estate experts and economists about their predictions for the housing market, it disclosed that almost 50% of all survey respondents said the following recession will initiate in 2020, with the first quarter of the year referred to the most as to when the recession will start.
The main culprit for the housing recession: monetary policy. The experts predicted that monetary policy will be the deciding factor this time around. In particular, they argued that the Federal Reserve could prompt slower growth if it raises short-term interest rates too quickly.
To put it simply, the US housing market is ripe for investment in 2020, making it a great time to buy investment property. A multi-generational housing market is creating limited supply and increased competition, driving up prices at the affordable end of the market for the foreseeable future.
In hot job markets and communities that fit the youngest generation’s ideals, price increases of 8-15 percent are possible year-over-year. For everyone else, real estate is appreciating at or just above the rate of inflation.
Factors affecting the 2020 housing market
Where Is the Housing Market Headed In 2020
2020 and Beyond Forecast
2019 Housing Market Trends