The American real estate market could be headed for trouble. According to Reuters, the number of houses sold in the U.S. during December 2017 have come in at an all-time low.
Additionally, single-family homes fell 11.8% while multi-family home sales rose only 1.4%. This is especially problematic as 83% of homebuyers report a high demand for single-family homes. However, American economists say the decline is understandable what with rising mortgage rates and the grand majority of the public being fully employed.
“We expect little growth in sales in 2018, given tight inventories,” said chief economist at Oxford Economics Gregory Daco. “Affordability will be crimped by rising mortgage rates, posing an additional headwind to sales.”
A housing shortage could put a damper on the formerly predicted real estate surge. As millennials, the largest generation since the baby boomer generation, enter their mid-twenties and mid-thirties, the demand for houses is expected to go up significantly.
The housing shortage could mean millennials will be resigned to living in apartments for a longer period of time despite rising rental rates. However, it isn’t only the housing shortage that could be causing the drop in sales.
The recent Tax Cuts and Jobs Act makes borrowing against one’s home for renovation purposes significantly less popular. Approximately 40% of homeowners reported that they planned to renovate this year. However, with homeowners now unable to subtract the interest on their loans during tax season the popularity of buying less-than-ideal homes and then renovating them using housing loans could make home buying less attractive.
Yet economists say the supply drop may not be considered a bad thing, but rather a healthy balance of supply and demand after a six-month period of high supply.
“New construction has shown signs of perking up, but remains well below estimates of demand,” said Zillow senior economist Aaron Terrazas. “More importantly, builders face rising labor, materials and land costs making it difficult to build at a price point attractive to entry-level buyers.”
Compared to the projected $9.74 billion net worth of the metalworking fluids industry, the median cost of an American house in December was as high as $246,000, a 5.8% increase from 2016.
Economists say they’re worried these high prices may slow demand for housing throughout 2018. Despite applications for mortgage loans being at their highest since April 2010, the price of houses has outpaced the average American wage.
Housing prices may be more likely to go down in the next few months depending on the state of the U.S. stock market. However, until the stock market fluctuates to impact real estate prices, the main problem in real estate remains the housing shortage itself in the shadow of high demand.
“A shortage of affordable homes for sale will frustrate the ambitions of many first-time homebuyers,” said Capital Economics property economist Matthew Pointon. “[They] will be forced to stay in the rental market for longer than planned.”