5 Housing Trends That Are Changing The Market Today

Is 2018 a good time to buy a home, sell a home, move up, or invest in real estate — or will you be better off parking your money elsewhere, whether that means buying a house in a different location or an investment in an entirely different industry? While no one knows exactly what will happen with home prices this year, if you have the right sources and know where to look, there is enough evidence to make a sound educated guess. 

Where will we see softening housing markets first, and which cities are still showing healthy growth? HouseCanary examined all 381 metropolitan statistical areas (MSAs) in the US for local affordability (and change in affordability), housing market price growth, and the pace of housing market price growth to pinpoint where the housing market is slowing down. 

The Best and Worst Markets: Affordability and Market Growth

While we are still seeing a positive trend in growth on average, the explosive acceleration we’ve seen over the past few years is clearly softening, market by market. US markets that have been headlining the recent growth cycle are decelerating dramatically, bringing their growth more closely inline with historically stable MSAs. Of the 25 markets that show the most marked growth deceleration, 10 are in Florida — and the list includes presumed stars like San Francisco, San Jose, Portland, and even Denver.

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The accelerating markets are few, and they tend to be smaller, historically affordable areas where the pace of market growth has been slower. And, in between, we find the middle range of comparatively stable MSAs, generally marked by challenging job markets and static local economies.

Some notable surprises are the New York metro area, which continues to accelerate (albeit by 0.09 percentage points), and Seattle, whose growth we expect to decelerate by 2 percentage points to 12% this year. What’s causing slowing growth in the housing market? There are dozens of factors in play, but the ones with the biggest impact during the next few months include: 

  • An affordability crisis in many rapidly appreciating markets
  • Waning home sales volume and prices in specific price segments
  • A likely increase to mortgage rates
  • Implications of the recently passed tax law
  • General uncertainty about the future

Finally, our analysis within individual metros found more pronounced softening in the luxury segment in several markets, typical of mid-to-late cycle behavior where exceedingly high prices in most desirable areas drive buyers further out in search of relative affordability.  Few regions are immune, with luxury softening everywhere from Dallas, Fort Worth, and Chicago to Atlanta, Las Vegas, and Florida markets like Miami and Tampa.

In Atlanta’s high-end Buckhead neighborhood, we can see the effects of this “luxury lag.” Although the price per square foot in Buckhead is still among the highest in the Atlanta metro area, its price growth is at the low end of the spectrum.

1. Affording the roof over your head

The real estate industry is facing a basic economic problem: lots of people want to buy homes but can’t realistically afford to do so in their current geographic area. This is because affordability, which describes the percentage of median household income spent on the median household mortgage in the geographic area, has become an increasingly acute issue over the past decade. Most financial experts suggest that households spend no more than 30% of income on housing, and many metro areas exceed that amount. Home prices, mortgage rates, household income, and local property taxes are all important factors in determining how affordable a certain MSA might (or might not) be.

Graphs charting the housing market have looked like a rollercoaster over the past decade: up and down, and now climbing back up again. But many markets haven’t  been stable or steady, and that not only contributes to uncertainty — it also makes potential first-time home buyers less courageous about taking the plunge into homeownership, lest anyone forgot the recent history of what can happen to a red-hot housing market.

Buyers who are ready to take the plunge are competing very vigorously for a limited supply of homes for sale, which adds volatility to the market and can keep home prices high or cause them to rise, à la 2004, in areas where homes for sale are particularly scarce (San Francisco, Seattle, and Denver are all good examples).

In some of those areas, the problem has become so acute that residents are spending more than 30% of their household income on housing. Thirteen of the top 100 MSAs passed that critical (and worrisome) barrier in 2017. In total, 30 of the top 100 are above 30% — 5 are above 50%, and there are some neighborhoods within these metros that top 70%.

So what does that mean for buyers? Not everyone is a millionaire, and many potential entry-level home buyers are also dealing with student debt and relatively low wages. There’s a segment of the market that may become long-term renters out of necessity rather than choice, if housing affordability continues to spiral beyond the reach of the average wage-earner.

2. Where will home sales and prices go?

The rate of home sales has been gradually making its way up from the depths of the recessionary lows, but remain relatively low compared to household growth. For example, current existing home sales are near 2003 levels, but household growth has increased 13.5% during that 14-year duration. Put it all together, and there’s pretty much only one way for the number of sales to go, and that’s up. Buoyed by an increasing number of new construction inventory coming online, we expect more buyers in the market for a home in 2018 as well, whether as owner-occupiers or investors.

In 2017, 10 of the top 100 MSAs saw prices soften (growth was at least 1% slower than the annual growth over the past three years), and growth is expected to slow (or continue to slow) in another 41 of the top 100 MSAs in 2018. 

Prices, however, are more diversified by locality. It’s true that collectively, overall home prices have gone up in the past few years, but the reality is that the housing market is much more granular than one national number can represent. Historically, when the economy was stable, most major markets moved up in unison — but when there’s economic volatility like we’ve seen, then micro-neighborhoods within the same city or town might start to increase or decrease in price seemingly independent of each other.

We can expect to see much more of this hyper-localized fluctuation within markets in 2018. Home prices and sales trends are going to be more nuanced at a ZIP code, neighborhood, and even block level as opposed to broad swaths of movement for a state or a market, and anyone parking money in real estate is going to want to understand why homes on one city block are fetching more money than homes on a neighboring street.

Where should you be parking your real estate investment dollars? We reveal the top markets for rental investors every quarter in our Canary Rental Index.

Access the most recent index

3. Mortgage rates: Only way to go is up

Mortgage rates fluctuate up and down, more or less following the influence of the overnight exchange rate at which banks trade money. That rate is set by the Federal Reserve, and with near-historic lows and relatively low inflation, the Fed has made it clear that it intends to raise the rate in 2018.

By this time next year, we may see mortgage rates as high as 5%, but is likely to end up nearer current rates at 4.75%. As rates go up, current homeowners who carry lower mortgage rates might be disincentivized to sell because both mortgage rate growth and home price growth will potentially price them out of buying back their own home from themselves, let alone secure a loan for a larger home.

That said, there certainly is a large pool of current and potential home buyers who remember when mortgage rates pushed higher than 6%, and they are less likely to be deterred by the higher mortgage rates we’ll see in 2018.

4. The tax man cometh

Individual taxes are so complicated that many of us rely on accountants or software to wrangle them. Add in significant changes to the status quo, and it’s no surprise why there has been a race to understand the effects of the new tax plan. Each filer’s unique circumstances, however, will ultimately dictate how the new tax law affects them, so it is tricky to make any blanket statements one way or the other on its overall effects on the economy.

That said, the two main changes of reduced mortgage interest deduction caps and the cap on the state and local tax deduction point to ‘zones’ of possible impacts.

Clearly, the most vulnerable position is likely to be for owners of high-end homes carrying mortgages between $750,000 and $1 million, which are also the same class of filers most likely to itemize and take advantage of the SALT deductions. Those homeowners won’t be able to deduct as much mortgage interest and property tax as they did before the tax law.

In most markets, that range represents the upper end of the housing stock — luxury homes. But in markets like San Francisco, Los Angeles, or New York, homes between $750,000 and $1 million might represent starter or mid-level homes, not the luxury segment.  

This is especially significant given that we’ve already observed the $1-million-plus segment of the housing market softening in several neighborhoods around the country.

We will have to see how the high-end market reacts in the upcoming buying season, but given the already waning demand in these markets, it’s hard to see how the new tax changes help this segment.

Explore county-by-county findings in HouseCanary’s recent Tax Reform Analysis.

One other potentially big effect of the law is on the psyche of the consumer. Fannie Mae’s 2017 year-end Home Purchase Sentiment Index showed that consumers are already pulling back from the confidence they had in the earlier part of the year. Throw in a new law that directly affects mortgage interest and property tax deductions, and it adds yet another element of uncertainty in an already uncertain market, all of which could result in consumers deciding to wait and see.

5. When nobody knows

The housing market is just one part, albeit a large part, of a vast economy in the United States — so it’s going to experience ripple effects from changes in other parts of the economy and social structure, such as employment, education, transportation and infrastructure, credit, politics, consumer sentiment, and many other components.

There’s one factor, however, that all parts of the market need to thrive and work well together, and that’s predictability: the security that you know what to expect with a reasonable degree of confidence tomorrow, next week, next month, and next year.

When it’s difficult to predict what to expect tomorrow (or next year), consumers have trepidation to take on major financial commitments, loaning money becomes riskier for the lender,  and generally there is an overall “wait and see” strategy for signals on future movement — all of which result in challenges for the housing industry. Although the overall economy in the U.S. is robust, uncertainty is rampant; there’s quite a bit of unpredictability surrounding inflation, future economic policy, economic growth, jobs and wages, and other areas.

We humans will always need shelter — a place to live — but as we discovered in 2009, that doesn’t make real estate recession-proof. An uncertain economy is going to influence who gets a loan to buy a home and at what rate, and that’s going to influence existing affordability and housing equality issues in turn. As a result, it’s going to become a necessity for consumers and investors alike to know as much as they can about any home they’re considering for purchase and whether that home is likely to retain its value in the future.

To get more data for any of the MSAs analyzed, contact [email protected].

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