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The slowing US housing market will have 'a small silver lining' in 2019

Amanda Fung

Don’t expect the housing market to make any seismic waves in 2019.

The market is ending 2018 on a low note with existing and new home sales on a decline. Even home price growth, which has been on the rise for the past six years, is finally stalling. Economists have called a peak in sales activity and home prices. But they have also said the slowdown will stop short of a crash.

Home prices will increase moderately in 2019, but you won’t see prices soar. And while interest rates will increase, an uptick in wage growth will also help to encourage people to buy a home.

“It’s going to be boring,” said Lawrence Yun, chief economist for the National Realtors Association, referring to 2019. “There will be no measurable increase or decrease.”

“Throughout next year, prices will continue to rise on a national basis in most cities around the country but the pace of increase will continue to slow,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, adding that toward the end of 2019 we could possibly see home price annual gains slow to 3%. Realtor.com’s prediction is slightly more bearish at a 2.2% annual price increase.

Homebuyers may want to make a purchase in 2019 as conditions slowly shift in their favor. Photographer: Daniel Acker/Bloomberg via Getty Images
Homebuyers may want to make a purchase in 2019 as conditions slowly shift in their favor. Photographer: Daniel Acker/Bloomberg via Getty Images

Home price growth has slowed for six consecutive months since April, according to the S&P CoreLogic Case-Shiller national home price index. And for the first time in a year, annual price growth fell below 6%, dropping to 5.7% and 5.5%, in August and September, respectively. October home price results will be released later this month.

A ‘small silver lining’

“For the first time we’re not seeing home price skyrocket, so maybe there’s some small silver lining for those who have been frustrated with the housing market,” said Cheryl Young, senior economist at Trulia.

Experts note that going into 2019, the price slowdown can be healthy for sales activity and good for buyers, who may already be experiencing some relief. According to Redfin brokers, 32% of offers they’ve written for clients who are buying a home faced one or more competing bids in November, down from 40% a year earlier — an all-time low since Redfin started tracking the data in 2011.

“A couple of years of home prices running twice the rate of home income growth leads to affordability challenges,” said Mortgage Bankers Association Chief Economist Mike Fratantoni. “If you’re a buyer in 2019, you won’t see home price running away from you at the same speed in 2018.”

Source: Yahoo Finance
Source: Yahoo Finance

Strong employment numbers and healthy wage growth leading into the new year will also likely help. In November, unemployment reached a 50-year low and wages rose 3.1% over the prior year, the same annual rate as in October — the fastest pace of annual wage growth since April 2009. While employment and wage growth is expected to slow in 2019 it will continue to remain strong and will likely offset any mortgage interest rate hikes, according to Blitzer.

While the Federal Reserve noted that it is still weighing a wait-and-see approach after an anticipated rate hike this month, experts expect interest rates to be higher next year than 2018. Yun predicts mortgage rates to hit 5.5% by the end of the year, but said it is “not alarmingly high” and agreed with Blitzer, noting that job creation and strong GDP is sufficient to “neutralize rising mortgage rates.” Although a rate above 5% would be a 10-year high, interest rates are still historically low.

‘The market reaction to interest rates is hardly immediate’

In a recent op-ed in The New York Times Yale Economics Professor and Nobel Laureate Robert J. Shiller wrote: “... the market reaction to interest rates is hardly immediate or predictable. The housing market does not react as directly as you might expect to interest rate movements. Over the nearly seven years of the current boom, from February 2012 to the present, all major domestic interest rates have increased, not decreased. So, while interest rates have been low, they have moved the wrong way, yet the boom has continued.”

“The difference between 50-75 basis points and its impact is not that big,” said Blitzer. “It may encourage people to shop around for a mortgage.”

While none of the experts predict 2019 to be a buyers’ market, they believe that things will shift in their favor. Some say they’re already starting to see more inventory on the market.

Redfin reported this week that the number of homes for sale in the major U.S. metropolitan areas the brokerage does business in was up 4.9% in November from the same month a year ago — the highest level of inventory growth since June 2015 and the eighth consecutive month that listings increased year-over-year.

More homes on the market will help to boost depressed inventory levels, but as Young pointed out, there are still “people holding back, not selling right away” and that may play out in inventory. So, there won’t be too much of an impact on sales activity or prices in 2019. Inventory will remain low due to moderate new construction activity as a result of an ongoing construction labor shortage and land costs.

“There will be a calming in the housing market, which will provide confidence for consumers who can buy a home without competing with other buyers, a more normal decision process rather than a hurried one,” Yun said.

Amanda Fung is an editor at Yahoo Finance.

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