The national real estate market has been strong for over a decade. Although there have been some concerns about a real estate bubble, current real estate trends show that market fundamentals remain solid.
Low unemployment, a steady economy, and low interest rates are good signs for buyers and sellers. However, high home prices and a lack of available inventory have kept some entry-level buyers out of the market. Housing affordability is a major concern, and states are starting to address it through a variety of rent reforms and protections.
Where are we in the real estate cycle?
Traditionally, real estate follows a cyclical pattern -- but the current period has been hard for economists to predict. This has led some people to wonder if we're facing another housing crash.
Fortunately, the fundamentals this time around are different from those in the mid-2000s. The economy still shows signs of steady growth. The gross domestic product (GDP) is increasing slowly but maintaining its upward trajectory. In the second quarter of 2019, GDP grew 2%. The unemployment rate remains at historic lows and, while wages have been slow to catch up, they've started to rise. That has increased consumer confidence and spending.
Builders also remain optimistic about the current state of growth. The National Association of Home Builders' monthly survey of builder confidence continues to show that builders see steady traffic for new homes and that their concerns are centered on labor shortages and the price of materials. However, one real estate trend to keep an eye on is that some major homebuilders, such as Lennar (NYSE: LEN), are reducing the amount of land they own.
Recessions tend to occur regularly, and statistically, another one could happen soon. A Sept. 2019 survey from YouGov showed that 46% of Americans think a recession will happen in the next two years -- that prediction could certainly shape real estate trends into the future. In that same survey, respondents indicated that they see real estate as one of the safest investments when compared to the stock market.
Fears of a recession may have also led to a dampening of the Fannie Mae Home Purchase Sentiment Index, which rose through most of 2019 but has started to drop. This is partly due to concerns over the ongoing trade discussions with China. Housing activity also tends to fall in election years.
How falling interest rates impact buyers
Interest rates have fallen in the past year after spiking at the tail end of 2018. Mortgage rates are expected to remain at historic lows for a while. This spurred an uptick in refinancing but hasn't tempted all buyers to get off the fence. Part of the reason is that housing affordability is strained in many markets. Even with rates below 4%, it can be tough for some buyers to purchase a home. Many first-time homebuyers are burdened by student loans and have had difficulty saving up a down payment.
Since the Great Recession, lenders have tightened up their policies, creating a challenge for some millennial buyers. However, that has started to shift a bit as lenders ease standards, making it easier for these buyers to finance a home.
Another growing real estate trend, especially in high-priced markets, is the emergence of startups that help people buy a home by taking an equity stake in the home that owners can buy out over time.
While it's true that millennials have been slower to hit milestones such as marriage and starting a family than Gen Xers and baby boomers, they're starting to make up for lost time. As they age, they're seeking out homes and prize walkable areas. This has led to the construction of starter homes and mixed-use developments that offer smaller homes but more access to the restaurants and retail opportunities that millennials value.
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Where real estate prices are rising the fastest
Prices have outpaced sales in most markets. In a recent forecast, CoreLogic projected that prices will rise by 5.8% annually until August 2020. While this indicates a strong upward trend, it's still lower than the double-digit growth seen across many markets in previous years. This may provide some relief for buyers looking for an entry point. It may also prompt some owners to stop waiting for the market peak and consider selling.
Lawrence Yun, chief economist of the National Association of Realtors (NAR) has predicted that home sales will rise in 2020. The NAR forecasts that home sales will rise by 3.4% in 2020. Inventory of homes for sale has remained below statistical averages. Traditionally, a six-month supply of inventory represents a balanced level of supply and demand. In the past several years, overall inventory has remained low and is particularly strained at the entry-level end of the market.
Certain markets where prices hit new highs, such as Seattle and San Francisco, have seen prices recalibrate over the past year. These markets have seen a population uptick due to the growth of the tech employment market as large companies such as Amazon and Facebook take up more commercial space and increase hiring. Overall prices were up most dramatically in top-tier coastal markets over the past five years. Las Vegas, Phoenix, and Tampa have been the top three growers for most of 2019, according to the S&P CoreLogic Case-Shiller Home Price Indices. Top market rankings shift often as people seek opportunities in secondary markets.
The 2020 report from the Urban Land Institute pegged Austin, Texas as the best market for real estate investment. Raleigh-Durham, N.C., and Nashville rounded out the top markets. While home prices are rising in these cities, they're lower than those in top-tier coastal markets.
High prices have also led real estate investors to seek new opportunities in smaller markets. With foreclosures and short sales at very low rates in many areas, there are fewer chances for real estate investors to find solid fix-and-flip investments in large cities.
The forecast for home building
While building has mostly bounced back from the Great Recession, it hasn't reached the highs seen in 2007. This is good news on one hand, because it means there's not an issue with oversupply. On the other hand, this lack of building activity has contributed to the lack of inventory and the steady increase in prices.
Construction has increased across the Sun Belt. High prices for land in California have led some homebuilders, including Toll Brothers, to concentrate on growing markets in Texas, Florida, Nevada, and Virginia.
Builders are struggling with construction concerns like the lack of skilled labor and high lumber prices.
Looking to the future
While it's impossible to know the exact direction the market will take, demographic trends show that millennials are poised to be the dominant force in housing for the next decade. Just as baby boomers changed housing, leading to the growth of suburbs, millennials have created their own real estate trends, spurring the development of walkable communities with good public transit that the Urban Land Institute dubbed "hipsturbias."
While the trade war, economic uncertainty, and an election year may put a damper on some growth in 2020, overall real estate trends are showing that demand for housing is still strong.