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Top Housing Market Predictions for the Year 2019
Approximate Reading Time: 10 Minutes
Summary: In this article you’ll learn about our top housing market predictions for 2019, and how economic factors like, rising interest rates, stock market performance, population and job growth, and consumer debt, will impact the housing market. We’ll share two predictions we expect in 2019 and how to plan accordingly.
There has been growing concern for real estate investors and how the housing market will perform in the coming year. With recent changes to the current Federal Reserve Monetary Policy, a decline in the stock market, a surplus of available jobs, all-time low unemployment rates, not enough affordable housing to accommodate a huge millennial population, and high consumer debt, the real estate market may seem unpredictable in 2019. However, there is still high demand for affordable real estate in growing markets.
Boiled Down Housing Theory
- Real estate values are tied to jobs
- Jobs are tied to the economy
- The economy is tied to the Federal Reserve and Government Policy
What is The Federal Reserve Policy?
The Federal Reserve is responsible for managing the monetary policy of the United States. Congress directs the Federal Reserve policy goals, which are to promote employment, regulate long-term interest rates and stabilize prices. The Federal Open Market Committee (FOMC), is comprised of 12 members, seven from the Board of Governors and five Reserve Bank presidents, and makes policies based on the economy. The FOMC meets about eight times a year to evaluate and vote on potential policy changes.
According to the Federal Reserve System, current FOMC policy directly affects interest rates and, currency exchange rates, prices of equities and other assets. Therefore, current Federal Reserve policy impacts household spending, business investment, production, employment, and inflation.
Fed Rate Hike History
The Federal Reserve is very much involved in regulating the economy (or tries to). It does this by raising or lowering interest rates. Basically, increasing or decreasing the money supply. Back in the last housing boom, it was very easy to borrow money. Easy lending resulted in the housing market crash of 2008. When the collapse happened, the Federal Reserve lowered interest rates to near zero levels, which jump-started the economy after it flatlined. The policy changes made it almost free to borrow money and thus, housing was reinflated. At the end of 2015, the FOMC increased interest rates by a small margin to see if the economy could handle it, which it could. The Federal Rates Fund by year is available here and is a good indicator of what to expect in the future.
Fed Rate Hikes 2018
There have been four interest rate hikes in 2018, which means the current Federal Reserve Monetary Policy is tightening. With raising interest rates on lending, home sales have slowed down across the U.S. The National Association of Realtors showed existing home sales dropped 3.4 percent in September of 2018. Lending rates are going up, which tightens the money supply to slow down the market.
Fed Rate Hikes 2019
The Federal Reserve increased interest rates four times in 2018 and as a result, home sales have dropped, but only slightly. The Fed Reserve may choose to do another rate hike sometime in 2019, however, with four increases last year, it may be unlikely. Check out the Federal Reserve calendar for a list of meeting dates scheduled in 2019.
Stock Market Declines in 2018
Most gains were lost at the end of the year with a dive in the stock market. Economists are asking the question, is the stock market affected by these rate hikes or is it a global reaction? Only time will tell and in the meantime, here are our real estate market predictions for 2019.
Housing Market Prediction #1: Gross Domestic Product (GDP) Will Slowdown
What is GDP – Gross Domestic Product?
GDP is the total value of goods produced and services provided in a country during a year. The current GDP in the United States is 3 percent. Our prediction is that GDP will slow down, to 2 percent in 2019 and continue to slow to 1 percent in 2020. Why the slowdown? Because of a rising Federal Fund rate, a decline in exports, and high national, corporate and personal debt. Each of these factors influence our nation’s GDP.
Housing Market Prediction #2: Unemployment Will Go Up Slightly
More Jobs Than Workers
According to the Wall Street Journal, there are over 7 million job openings in the US, more than ever before. As of August 2018, there were 902,000 more available jobs than workers (also a record). The United States is seeing one of the lowest unemployment rates of all-time, just 3.7 percent at the end of 2018. A healthy unemployment rate is considered to be somewhere between 4 and 6 percent.
Record job openings is not necessarily good for the economy because it forces employers to pay more and offer more incentives to attract qualified employees. These additional costs won’t be paid for by stockholders, rather, it will be passed on into the price of products or services, which increases inflation. More inflation means the Federal Reserve will want to raise interest rates. If we see more rate hikes in 2019, the economy will suffer. The solution is to either slow down job growth or find more people to fill these openings. Because the unemployment rate is so low, we expect a slight uptick in 2019.
Factors That Affect Demand & Supply for Housing
As real estate investors, we need to pay attention to which jobs are here to stay and will grow, and which ones will disappear as unemployment rates level off. There are areas across the U.S. that are growing quickly, with not enough housing (i.e. Salt Lake City, Utah & Reno, Nevada) to accommodate a population influx. We want to focus on areas that are growth markets and know where those are. For instance, the latest report on Reno states that approximately 7,000 new homes need to be built every year in order to keep up with population growth and are no where close to meeting that demand. As Reno is only four hours away from Silicon Valley, more and more jobs are moving there. This is an area we don’t expect to see a rise in unemployment, rather the opposite.
Economic Factors Affecting the Housing Market
U.S. Home Prices on the Rise
There are several factors that affect housing prices. Generally speaking, the housing market is on solid ground and we don’t expect a housing crash in 2019. Following the last recession, between 2008 and 2012, the cost of homes dropped significantly. People who bought during this timeframe took advantage of low home prices and interest rates (set by the fed reserve), in an attempt to boost the economy and housing market. Now we are seeing a lot of homeowners choosing to stay because they have built so much equity in their homes and are locked into low mortgage payments and interest rates. We don’t expect the tightening measures and the government policies to really affect house prices, at least not homes in the median range. The high end homes will be more affected by the changes to the tax law, because you can no longer write off a vacation home or large mortgage payments, like you could previously. If you are buying and selling high end homes, make sure you can handle potentially lower prices and a longer holding period.
Interest Rates Increase While Mortgage Rates Decrease
The FOMC raised the fed fund rate to 2.5 percent at the end of December 2018. We expect to see an increase in interest rates to 3 percent in 2019. Even with these increases, interest rates still remain very low, especially if compared historically. Therefore, home sales should continue to increase, as rates remain relatively low and affordable. Generally speaking, when the fed raises interest rates, it’s because the economy is booming, so mortgage rates tend to go up as well. But this time, fixed mortgage rates went down in December. Doug Duncan, Chief Economist for Fannie Mae, thinks mortgage rates continue to stay so low because of all the turmoil happening in Europe (i.e. BREXIT). A lot of European money is seeking the safety of U.S. bonds. When there are buyers for bonds, there are also buyers for long-term mortgages, which tends to keep interest rates low. We expect to see home sales increase in the next month because interest rates remain low.
U.S. Population Growth Rate
The population of the U.S. has grown since the last recession by over 25 million people. We have a growing population due, in large part, to a huge generation of millennials that have graduated college, are getting jobs with a booming economy, and forming households.
What is Household Formation Growth?
Household formation growth is an estimate of the future number of households expected to be formed. This is calculated based on expected population growth and the rates at which different age (i.e. Millennials) and ethnic groups form households / buy homes. Population growth is predicted by natural increase, migration and jobs.
Consumer Debt at All Time Highs
Consumer debt has reached over $25 billion as of 2018. Lenders look at a potential homebuyers debt-to-income ratio, as a key metric for approving or denying mortgage loans. Higher cost of mortgages as interest rates increase, massive consumer debt, and a growing population, with a lack of affordable housing being built, is resulting in more renters. According to Zillow, over 36 percent of households in the U.S. rent, with that number continuing to grow. Landlords will experience more demand for their rental properties, while those looking to buy a home will have less competition. We expect to see more of a buyers market in 2019, and less of a sellers market, as we’ve seen in the last few years. There is a chance of more affordable housing becoming available, if there are enough “move-up” buyers looking to buy higher end homes in the coming year. However, this would require a large amount of homeowners looking to upgrade in order to increase affordable housing inventory.
The Impact of Money Supply & Interest Rate Predictions
The money supply has been increased substantially. Values of stocks and houses went up along with the money supply. When we experience a recession, the Federal Reserve tends to lower interest rates so that people keep buying houses. The issue today is that rates are already so low, if we do experience a recession, rates can’t be lowered any more to boost the economy. One theory, as to why the Federal Reserve is slowly raising interest rates, is in the event of a recession, there will be room for interest rates to decrease. Money supply is an important factor for real estate investors to pay attention to moving forward. Affordable houses may go up in price, while high-end real estate may decline.
Question 1: What is the possibility that the rate hikes are in response to an overheated stock market in many cities or real estate bubbles?
This administration is sort of going against the Fed Reserve and what they want to do. They’re not working in unison. The economy is doing too well, which is causing inflation, in both housing and the stock market. This sets us up for a potential crash. Both parties need to work together to raise rates to prevent inflation and ultimately a crash. If you can afford to hold your property through a recession, then you will be fine. Overtime, it will go up in value, as proven historically.
Question 2: How do you feel about national debt and how it will affect the real estate market in the future?
It’s a massive problem and I have no idea how we’re going to pay for it. A lot of this debt is going to get wiped out, which means someone is not going to get paid. Real estate is a hard asset, so it has value. If you have affordable housing, in a well-located area, is the best strategy. This is one of the reasons we’re building in Costa Rica, because it’s not dependent on the US’s economy. We have diversified by building in areas and countries that have low debt and are seeing growth.
Question 3: Existing apartment buildings or developing?
If you’re in an opportunity zone, you need to do a real deep rehab for an existing apartment (you must add value). This is why we’re choosing to develop or build.
Question 4: Are there still 1031 Exchange opportunities in California?
Yes, it’s a great time to sell your California property in exchange for a property in opportunity zones.
Question 5: When the recession comes, do you think Dallas home prices will fall?
I really don’t think so. There has been massive job growth in the Dallas real estate market. I don’t think they will increase a ton, but I don’t see them falling because housing prices were undervalued by 26% previously (before the boom).
Although no one can predict exactly what will happen, based on past trends and data, we feel confident that our housing market predictions for 2019 will help guide investors to pursue real estate in growing markets that will produce lucrative results. With all the changes in our nation’s economy and monetary policy, there is still a need for affordable housing across the U.S., offering opportunities for real estate investors to earn passive income, even as interest rates rise and fall.
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