After several years of rapid growth in both demand and pricing for the housing market, 2019 is shaping up to feature something we’ve not seen in awhile: a more normal rate of price appreciation. However, inventory will remain constrained, especially for entry-level homes. According to a recent article by RISMedia, multiple sources such as Realtor.com, Zillow and Trulia are predicting a market with home prices still rising, but at a slower rate more in line with wage growth. At the same time, a projection by Realtor.com suggests overall sales levels could also soften slightly, potentially falling by about 2.0 percent.
However, these falling sales levels could worsen a housing shortage which is likely to remain with us for some time. A recent analysis by Freddie Mac concluded that the annual rate of construction is about 370,000 units below the level required by long-term housing demand, leading to an existing pent-up shortfall of over 2.5 million homes. Until construction of new homes is able to ramp up and stabilize at higher levels, these shortfalls will continue to put some upward pressure on home prices and rents.
While more inventory is expected to come online as sellers rush to cash out their gains, many other existing homeowners will stay in place in order to enjoy their low-rate mortgages of under 5.0 or even 4.0 percent. As a result, some sources indicate this will contribute to continued housing shortages, with overall inventory expected to increase by less than 7.0 percent next year. Most importantly, the largest share of that increase is anticipated to be in the mid- to higher-end pricing tiers, which does not address the pent-up demand for entry-level homes. The entry-level market segment will remain the strongest for demand, and the weakest for inventory.
For these entry-level buyers, higher interest rates would likely impact their homeownership choices in terms of location, price point and product type. However, given the recent retreat from stocks into long-term bonds, mortgage rates have slipped, thus making mortgage payments more affordable. The combination of a deceleration in price appreciation and lower interest rates could re-boost demand, thus putting even more pressure on low inventory levels. Realtor.com also says that millennial buyers are expected to account for 45 percent of mortgages in 2019, with most looking to buy that first home, or perhaps move up from one they bought near the beginning of the housing rebound. But members of Gen X won’t be far behind, expecting to account for another 37 percent of new mortgages, although they’ll likely be trading up to the mid- or high-priced tiers.
With most first-time buyers also facing rising rents over the past few years, they’ll likely continue looking for entry-level homeownership opportunities until they find the right fit. Even though the market is not expected to favor buyers over the next few years, neither will sellers to able to field multiple offers as they did this year or last. If 2019 is a pivotal year for the housing market, it will be because the market has normalized more equally among sellers, buyers and renters.
For its part, TTLC is poised to help address this critical need for more housing through our focus on creating a variety of housing opportunities with our builder partners, with a core focus on entry-level and moderately priced homes. Specifically, in more established urban areas, we are seeking to add housing inventory by repurposing under-utilized or obsolete properties to new residential uses.