With every new year, those of us in real estate and other businesses look into our crystal ball to try to assess what lies ahead. And as we assess the outlook for housing in 2020, we should note that one group is unusually bullish – homebuilders.
According to the December NAHB/Well Fargo Housing Market Index, homebuilder confidence was at its highest point since June of 1999. With a low supply of existing homes, low mortgage rates and a strong labor market, builders are feeling better about their business than they have in two decades. Not that everything is perfect, or course. According to NAHB chief economist Robert Dietz, “While we are seeing near-term positive market conditions with a 50-year low for the unemployment rate and increased wage growth, we are still under-building due to supply-side constraints like labor and land availability. Higher development costs are hurting affordability and dampening more robust construction growth.”
In other words, homebuilders aren’t building nearly as money homes as they could if there were no impediments. That, in a nutshell, continues to define the residential real estate market going forward: Limited supply and continued strong demand.
The National Association of Homebuilders (NAHB) Housing Market Index rates the relative level of current and future single-family home sales. A reading above 50 indicates a favorable outlook on home sales; below 50 indicates a negative outlook.
Looking into 2020, here are the main factors we see driving the housing market.
Inventory continues to be low.
2020 will not bring a solution to the inventory shortage that has plagued the housing market since 2015. In fact, inventory could reach a historic low, as a steady flow of demand, especially for entry level homes, and declining seller sentiment combine to keep a lid on sales transactions.
With housing prices expected to stabilize and concern over economic uncertainty, there will be little incentive for baby boomers to sell in the coming year. The younger Gen X is more likely to up-size and free up entry level homes, but not fast enough to ease inventory woes.
Millennials will continue to drive housing demand. As we’ve written about previously, Millennials have been late to enter the housing market. But now they appear to be making up for lost time. In ever greater numbers, Millennials are getting married, starting families, and looking to take part in the American dream of home ownership. According to Realtor.com, younger buyers are eschewing inner-city living and have their sights set on 1,800 square-foot homes in the suburbs, with good neighborhoods and decent schools. Realtor.com also says millennials – with the oldest members approaching 40 and the biggest cohort turning 30 in 2020 – will surpass 50% of all home purchase mortgages.
Interest rates will remain supportive of the housing market. The average interest rate for a 30-year fixed-rate mortgage is 3.77% as of Jan 22. We’re not that far from the all-time low (reached in 2012) of approximately 3.3%. Global economic growth is projected to reach its lowest level since the Great Recession, and if a Democratic candidate wins the presidency, it could be a negative economic catalyst, at least in the short term.
Also, as we write, fears of the SARS-like Coronavirus epidemic centered in China could take some steam out of the global economy. So, look for continued low rates – and it’s not out of the question that the Fed will cut interest rates a couple of times in 2020.
If a recession occurs, housing could hold up well, like in previous downturns. There is talk of a potential U.S. recession in 2020 – Goldman Sachs places the probability at about 25%. In the recent past, overheated housing markets helped tip the economy into recession. However, unlike previous economic downturns, there is an extremely low inventory of homes. The lack of supply could serve to prop up prices – especially on the lower end – if a recession sets in.
Overall, expect a stable housing market in 2020. A possible wild card could be the 2020 presidential election. But no matter the outcome, with housing inventory at record lows, demand for houses increasing, and employment strong, we see it as unlikely that the housing market will suffer a significant downturn this year.
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