Inventory constraints that have fueled a sharp rise in home prices and made it difficult for buyers to gain a foothold in the market will begin to ease in 2018 as part of broad and continued market improvements, according to the recently released realtor.com® 2018 National Housing Forecast.
The easing of the inventory shortage, which is expected to result in more manageable increases in home prices and a modest acceleration of home sales, is being predicted based on developments first detected by realtor.com® in late summer 2017.
The annual forecast, which is among the industry's bellwethers in tracking and analyzing major trends in the housing market, also foresees an increase in millennial mortgages and strong sales growth in Southern markets.
" will set the stage for a significant inflection point in the housing shortage," says Javier Vivas, director of economic research for realtor.com®. "Inventory increases will be felt in higher priced segments after the spring home-buying season, which we expect to take hold and begin to provide relief for buyers and drive sales growth in 2019 and beyond."
Inventory expected to begin to increase
In August 2017, the U.S. housing market began to see a higher than normal month-over-month deceleration in inventory that has continued into fall. Based on this pattern, realtor.com® projects U.S. year-over-year inventory growth to tick up into positive territory by fall 2018, for the first time since 2015. Inventory declines are expected to decelerate slowly throughout the year, reaching a 4 percent year-over-year decline in March before increasing in early fall, after the peak home-buying months.
Boston; Detroit; Kansas City, Mo.; Nashville; and Philadelphia are predicted to see inventory recover first. The majority of this growth is expected in the mid-to-upper tier price points, which includes U.S. homes priced above $350,000. Recovery for starter homes is expected to take longer because their levels were significantly depleted by first-time buyers.
Price appreciation expected to slow
Home prices are forecasted to slow to 3.2 percent growth year-over-year nationally, from an estimated increase of 5.5 percent in 2017. Most of the slowing will be felt in the higher-priced segment as more available inventory in this price range and a smaller pool of buyers forces sellers to price competitively. Entry-level homes will continue to see price gains due to the larger number of buyers that can afford them and more limited homes available for sale in this price range.
Millennials anticipated to gain marketshare in all home price segments
Although millennials will continue to face challenges next year with rising interest rates and home prices, they are on track to gain mortgage market share in all price points, due to the sheer size of the generation. Millennials could reach 43 percent of homebuyers taking out a mortgage by the end of 2018, up from an estimated 40 percent in 2017. With the largest cohort of millennials expected to turn 30 in 2020, their homeownership marketshare is only expected to increase. "Millennials are a driving force in today's housing market," adds Vivas. "They already dominate lower price home mortgage and are getting close to overtaking older generations for mid- and upper-tier mortgages. While financially secure in general, their debt-to-income ratios have started to increase as they compete for higher priced homes."
Southern markets predicted to lead in sales growth
Southern cities are anticipated to beat the national average in home sales growth in 2018 with Tulsa, Okla.; Little Rock, Ark.; Dallas; and Charlotte, N.C., leading the pack. Sales are expected to grow by 6 percent or more in these markets, compared with 2.5 percent nationally. The majority of this growth can be attributed to healthy building levels combating the housing shortage. With inventory growth just around the corner, these areas are primed for sales gains in years to come.
Tax reform will be a major wildcard
While the ultimate impact of tax reform is unknown, there are provisions that are likely to decrease incentives for mobility and reduce ownership tax benefits. On the flip side, some taxpayers, including renters, are likely to see tax cuts. While more disposable income for buyers is positive for housing, the loss of tax benefits for owners could lead to fewer sales and impact prices negatively over time with the largest impact on markets with higher prices and incomes.
In 2018 home prices are anticipated to increase 3.2 percent year-over-year after finishing 2017 up 5.5 percent year-over-year. Existing-home sales are forecast to increase 2.5 percent to 5.60 million homes due in-part to inventory increases, compared to 2017's 0.4 percent increase or 5.47 million homes. Mortgage rates are expected to reach 5 percent by the end of 2018 due to stronger economic growth, inflationary pressure, and monetary policy normalization in the year ahead.
|Housing Indicator||Realtor.com® 2018 Forecast|
|Home price appreciation||3.2% increase, enabling a sales pick-up|
|Mortgage rate||Average 4.6% throughout the year and reach 5% (30-year fixed) by the end|
|Existing-home sales||2.5% growth, low inventory trend starts to reverse|
|Housing starts||3% growth in home starts; 7% growth in single-family home starts|
|New-home sales||Increase 7%|
|Homeownership rate||Stabilize at 63.9% after bottom in Q2-2016|