After the slowdown in home sales in late 2018, real estate professionals have been holding their breath, waiting to see if a real estate downturn is in the cards, or if this market dip was a temporary speed-bump.
The real-estate market has begun to put on the brakes for home price escalation. In 2017, we saw the first published list of cities with falling real estate prices-the first price reductions since prices started climbing after the recession-mostly, at that point, in secondary markets and smaller towns. But by early 2018, some big cities began to experience price declines as well.
According to Redfin, by fall 2018, around 27 percent of homes listed for sale nationally had experienced price drops, the highest level on record since Redfin began tracking this metric in 2010 (Redfin defines a price drop as a reduction of between 1 percent and 50 percent). According to the realtor, some markets that included the biggest year-over-year reductions in prices in mid-fall 2018, included Seattle, Atlanta, Las Vegas, and San Jose, Calif. A headline from The Seattle Times said: “Seattle Home Prices Down $80,000 from Peak Amid Unprecedented Spike in Homes Sitting Unsold.”
In Manhattan, according to a report from Douglas Elliman, by the end of 2018, the median price of a condo or co-op had fallen to $999,000, a 5.8 percent decline from $1.06 million in 2017, and wiping out all price gains since 2015. Local specialist Walburg Realty says, “Manhattan has officially moved to a buyers’ market, with offers routinely coming in at 25 percent below asking price.” California, which has been the price increase leader for the past several years, saw home sales volume slow to a 10-year low in early 2019. Price increases seem to be slowing or stalling nationwide, and March was the eighth consecutive month of year-over-year sales declines,
Main Causes for the Housing Slump
The home sales slump can be mainly attributed to four things:
- The Fed’s raising interest rates in 2018, which caused interest on mortgage loans to rise to a seven-year high.
- The impact of the new tax law changes, which limit deductions for state and local taxes, including property taxes, to $10,000; and the change in the maximum mortgage principal eligible for deductible interest to $750,000 for a home.
- China’s retreat from the U.S. real-estate market. For the past several years, foreigner buyers, led by the Chinese, have accounted for a significant percentage of purchases for U.S. residential and commercial real estate, helping to buoy the market. But as Trade Wars and threats of rising tariffs have escalated, China has backed off of investments in the United States. China-historically, the biggest buyer of U.S. Treasuries, with $1.12 trillion in holdings-has also cut back on investing in those securities as well.
- In many areas of the country, lower than normal numbers of housing starts and tight inventories of homes for sale have constrained the market and forced prices higher than many prospective home buyers can afford.
The housing market is one-sixth of the U.S. economy, so not only is a slowdown in home sales cause for alarm for the real estate industry, but it could also be a threat to the economy as a whole. There has not been a period of booming economic prosperity in this country in which real estate has not been a major driver and most economic downturns are, at least in part, affected by declining real estate sales. So, it is probably accurate to say as goes real estate, so goes the economy.
Positive Factors May Buoy Outlook
On the positive side, there are a number of factors that can potentially put wind in real estate sails. First, the Fed has stopped its advance of interest rate increases (for now), and interest rates for home loans in 2019 have come down and are the lowest in years, though experts say this may not last. Real estate professionals are hoping that these lower interest rates will convince those who are thinking of buying a home to go ahead and do so.
Indeed, it seems to be working. Sales of previously-owned homes posted their largest monthly gain, since 2015, in February-an increase of 11.8 percent-though the sales volume was still about 2 percent below the prior year for the month. In mid-March, one week’s mortgage application volume rose by 18 percent, while refinancing applications were up 39 percent. Lower interest rates are particularly attractive to homeowners looking to save money by refinancing. Of course, for many regions of the country, March gets a seasonal kick and is historically the best month of the year for home sales. March sales climbed by around 29 percent over February, but according to RE/MAX, were still 8.6 percent lower than March 2018.
There is pent-up demand in the market, as millennials, who have thus far delayed marriage, get ready to form households and start families over the next decade. The oldest millennials are now in their late thirties, and it is difficult to see how they can put off adult life decisions much longer. Unlike millennials, according to a report from Bank of America Corp., 49 percent of Generation Zers, now in their early 20s, have already started saving to buy a home.
Realtor.com reported that in March 2019, the national median home price for all homes (new and existing) listed for sale reached $300,000 for the first time ever. Census Bureau figures show that the median price of a new home spiked at $343,400 in late 2017 and then dropped to $315,300 in February 2019. (To further put that into perspective, in 2000, the median price for a new home was $163,000, and in 2006, at the pre-recession pricing peak, it was $244,600, dropping to a low of $205,100 in 2009, amidst the housing crisis.)
A recent survey by realtor.com revealed that 50 percent of potential home buyers say they want to find a home for $200,000 or less, but the inventory of homes in that entry-level price range reduced by close to 10 percent last year, and it is especially difficult to find homes for that price in larger cities and/or close-in areas. While many millennials have been renting in urban areas, they are now finding that in order to locate an affordable starter home, they must venture to the outer suburbs. Unfortunately, the majority of builders seem to be eschewing low-end construction and starter homes in favor of more expensive high-end homes, which are more profitable.
A slowdown in the real estate market, with prices stabilizing or dropping a bit, could spell good news for millennials looking for their first home and for home buyers in general. If housing experiences a price correction, rather than a collapse – few real-estate experts think that the housing market will crash again like it did during the Great Recession, because lenders say they have taken more precautions-it could provide opportunities for more middle-class home buyers, especially young couples. Of course, this may not be good news for those wishing to sell their homes.
Retailers Chase Home Market’s Highs
Home Depot’s Expo Home Design Centers, stores filled with upscale merchandise to furnish, outfit and improve homes, grew rapidly during the pre-recessionary housing boom. But in 2009, as home sales dried up during the recession, the DIY retailer shuttered those units, abandoning the high-end, more decorative end of the business, and returning to the more basic goods in its traditional warehouse stores.
A new player is entering the United States retail home market. Improve USA, a concept first opened in Canada, is building what it describes as a 520,000 square-foot supermall in the Atlanta area, bringing together 429 retail showrooms into a shopping hub for improving and furnishing homes. The concept will present a full array of home products, ranging from kitchen and bath appliances to hot tubs and decks, home entertainment, windows and cabinetry, furniture and art, flooring and finishes, and including categories for architects, interior designers and custom builders. The one-stop destination’s goal is to become a regional magnet for home shopping. Let’s hope the timing works out better for Improve USA than it did for Home Depot’s Expo Centers, a decade ago. A sharp or sustained downturn in home sales could spell difficulties for this new concept.
Of course, a thriving market for home sales drives purchases of other related home goods, including DIY materials, furniture and accessories, appliances, home entertainment, gardening, and more. Today, home retailers including Crate & Barrel, West Elm, Pottery Barn, Restoration Hardware, T.J. Maxx’s HomeGoods, IKEA, Bed Bath & Beyond and others are striving to hold their own, as some home businesses begin to experience softness in sales. Both Home Depot and Lowe’s failed to meet analysts’ projections for the Fourth Quarter of 2018 and have expressed concern about business in 2019.
Meanwhile, a loyal customer audience is waiting for successful online home retailer Wayfair to open its first brick-and-mortar store, this fall, at Brookfield Properties’ Natick Mall, Mass.
Let’s hope that the real estate market’s spring bounce continues and that 2018’s dip in home sales was temporary.