The 2020 Outlook for the Housing Market in an Era of Economic Uncertainty
The Declining Supply of U.S. Homes for Sale
One of the factors that has kept propelling the housing market to new highs has been the short supply of homes in the country. Especially in hot urban areas, prices have risen as builders cannot build new homes fast enough. However, as prices have risen, builders have found some ways to meet demand in some markets, and that has started to put a crimp on housing prices.
The Fed Is Done Cutting Rates
Another factor that has helped the housing market remain strong is that rising interest rates have not carried through to mortgage rates. In other words, although the Federal Reserve has raised interest rates several time in 2019, this has not impacted mortgage rates. The yield curve has flattened and mortgage rates are more dependent on the long end of the yield curve, meaning that the longer duration interest rates have not changed even as the short-term ones rise.
In 2020, there are a number of factors that can affect housing prices going forward. The first major factor is whether interest rates will continue to remain low. The Federal Reserve adjusted interest rates lower after a sustained rate hike campaign as there have been signs that the economy is slowing. The Federal Reserve has indicated that its rate cutting campaign is winding down as growth has moderated to a point where inflation seems to not be a threat.
Will There Be a Recession in 2020?
The main issues going forward are the strength of the economy and the continued supply of new homes. Many economists are predicting a recession that would begin in the latter half of 2020. In some cases, recessions actually are a net positive for residential real estate because low interest rates draws buyers into the market. However, the last recession tested this proposition because the economic slowdown caused banks to tighten credit and stop lending because the Great Recession was sparked primarily by the real estate market.
There is much that remains to be seen as the U.S. enters an election year. The trade war with China has threatened to tip the U.S. economy into a recession. However, the stock market and the economy have been resilient and there is at least a thought that the Federal Reserve can engineer a soft landing for the economy.
The Millennials and the Housing Market
Another factor that can influence the marketplace in 2020 is the behavior of the millennials. The question is whether they will enter the market as homebuyers in large numbers or continue to rent homes. Many millennials are saddled with student loan debt and unable to obtain a mortgage to buy a home. However, the continued strength of the market depends on the millennials as Baby Boomers start to age. At some point, sustained home price hikes will price the millennials out of the market.
It is millenials' tastes that are starting to dictate how and where new homes are constructed. This is part of the reason for the abundant new housing supply in city centers that has begun to tap the brakes on home price increases in certain cities. At this point, we are beginning to witness a generational handover in the housing market.
New Building Permits Will Hike Supply
One of the big predictors of the housing market going forward are the number of new building permits. This is a leading indicator of the amount of new supply on the market. When building permits increase, there are new homes being built and less of a chance of a shortage driving up prices. Nonetheless, there are also signs that even this higher level of building may not be enough to bring supply up to the level of demand.
Much remains to be seen about whether the recent rally in home prices is sustainable. 2020 will be a key year in determining whether the rally has entered a sunset period.
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