April is traditionally the heart of real estate’s spring selling season. ‘Shop in the spring, move in the summer’ is often the strategy, especially for those with school-age children. According to the National Association of Realtors, 50 percent of home sales take place in the summer, with most buyers signing purchase agreements in late spring.
This year, some potential buyers may approach the market with caution. The housing market hit a slump in the second half of 2018, raising fears for some potential buyers that home values could be due for another painful drop. The shadow of the major collapse in housing prices during the Great Recession of 2007-2009 still looms large. Although this is an understandable concern for anyone considering a major purchase, we believe housing fundamentals are in much better shape than the market’s late 2018 performance implies.
Recent trends are unsustainable
In the second half of 2018, housing market sentiment endured a confluence of negative developments: a jump in mortgage rates, plunging stock prices, two major hurricanes (Florence in September and Michael in October), limited availability of homes for sale and growing talk of a pending recession.
While these perceived threats have largely subsided, the housing market still faces a fundamental constraint in the form of too few homes available for purchase. Nationally, the number of single-family homes on the market at the end of 2018 was the second lowest on record since 1982. The only year that ended with fewer homes available was 2017.1
Overall, single-family home sales were down 3.5 percent in 2018, according to the National Association of Realtors, but the median transaction price was up 4.9 percent to $257,267.
Supply remains the primary constraint
Demand remains solidly supported by a strong job market and rising household incomes, in our view. At the end of January 2019, the Conference Board’s Consumer Confidence survey showed the percentage of people planning to buy an existing home within the next six months jumped to a new 30-year high as mortgage rates moderated and the stock market recovered.
Overall, we believe existing home sales are likely to be flat in 2019, as potential transactions remain constrained by availability. Prices, however, should continue to see healthy gains. We project price increases of 3 to 6 percent nationally this year.
New home sales, meanwhile, are likely to do a bit better — they were up 2 percent year-over-year in 2018 — but labor shortages and higher material costs are likely to further limit inventory (supply) in this arena as well.
Is housing still a good investment?
Real estate markets are always subject to local conditions, but housing fundamentals on a national scale are quite healthy, in our view. According to the real estate research firm Black Knight, the percentage of mortgages that were 30 days or more past due ended 2018 at its lowest level since the data was first tracked in 2000.
Affordability, though well off its recent highs, also remains attractive relative to historical norms. Homeowner equity as a percentage of a property’s value has been rising rapidly (at the national level) in recent years, as owners have been much more conservative around cash-out refinancing and other borrowing options.
For decades, investors have regarded homeownership as one of the soundest investments an average American could make. The housing bubble and subsequent crash altered that view somewhat, leaving many leery of housing’s potential volatility. Indeed, in the years ahead, housing could face periodic pressure from rising interest rates.
Overall, however, housing fundamentals appear well supported by sound financing and the fact that housing demand exceeds the available supply in many areas. Housing can serve as an important component of any long-term term financial plan.
Talk to your advisor about your current real estate exposure and whether it aligns with your long-term financial goals.
Submitted by SCCCC member:
MBA, CRPC®, CMFC®, ChFC®, AEP®
Business Financial Advisor
Martin's Financial Consulting Group