Last week I had lunch with a friend of mine that runs an analytics firm. His clients include some of the largest real estate companies in the country. When I asked him about the housing market, he said, “it’s definitely cooling off, and I don’t think it’s cyclical.”
That conclusion appears to be echoed by other industry experts. Cheryl Young, a senior economist at Trulia, a home and neighborhood website for buyers and renters to find homes across the United States, implied that several months of data is showing that the market is softening. Additionally, Freddie Mac, the Federal Home Loan Mortgage Corporation, is projecting a 0.9% decline in both new and existing home sales. Finally, Michelle Meyer, an economist at Bank of America Merrill Lynch (BAML) noted that existing home sales peaked in November 2017 at 5.72 million. As of August 2018, existing home sales remained unchanged due to rising mortgage rates and a stagnant wage growth. While new home sales recorded a small rise of 3.5 %, it was still well below levels prior to the Great Recession.
Historically low levels of inventory have been factoring into a softening market. Lower inventory means less options for buyers, which in turn usually means a rise in the prices of homes. Higher prices can often deter potential buyers who do not want to be stretched out of their financial “comfort zone” or may not qualify for a higher priced home. According to the National Association Realtors, “the number of homes for sale in the United States has fallen for three straight years, and eight out of the past ten years.” Challenges such as an ongoing shortage of construction labor and increased building costs could also put a damper on the inventory levels in the housing market.
According to the U.S. Commerce Department, building permits, a leading indicator of future home sales, fell 5.7%; despite the fact that new housing starts rose 9.2%. Furthermore, the Urban Land Institute (ULI) just revised its forecast for housing starts. ULI stated housing starts would remain “below long-term average,” and lowered its original predictions for new home starts for 2018 -2020 by the following percentages: 2018- down 2.5%; 2019 – down 5.8%; 2020 – down 2.7%. Additionally, the original predictions for a rise in home prices by ULI is also down a few percentage points. For 2018, ULI predicts a 5% increase in home prices, down from its original estimate of 5.2 %. For 2019, the group is forecasting a 4.2% price increase, down from 4.3% and for 2020, a 3.4% increase, down from its original prediction of 4%. There is also a steady increase in the price reductions of homes. According to recent Zillow data, 15% of homes listed for sale in the United States, had a price reduction.
While the housing market is just one factor we look at when gaging the overall health of the economy, it looks like the slowdown in housing is consistent with other economic data we’re seeing which also indicates the economy is starting to cool.
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