Summary: In this article you’ll learn about our top housing market predictions for 2020, and how economic factors like rising interest rates, stock market performance, population and job growth, politics and consumer debt, will impact the housing market. We’ll share predictions we expect in 2020 and how to plan accordingly.
- Boiled Down Housing Theory
- What is The Federal Reserve Policy?
- Stock Market Rises in 2019
- Housing Market Prediction for 2020 #1: Federal Deficit Could Trigger a Recession
- 2020Housing Market Prediction #2: Mortgage Interest Rates Will Remain Relatively Low
- 2020 Housing Market Prediction #3: Political Climate Remains Uncertain
- 2020 Housing Market Prediction #4: Tariffs Should (Hopefully) End
- 2020 Housing Market Prediction #5: More Jobs, Less Workers
- 2020 Housing Market Prediction #6: More New Renters Than Owners
- 2020 Housing Market Prediction #7: The Housing Market Will Remain Steady, But Expect Slower Price Growth
- Investor Questions
There has been growing concern for real estate investors about 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 2020. 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.
Stock Market Rises in 2019
The stock market saw overall gains in the last year. After a tough end to 2018, the market bounced back with a strong 2019, thus increasing housing prices and boosting consumer confidence in the economy. What do we expect in 2020? Only time will tell and in the meantime, here are our real estate market predictions for 2020.
Housing Market Prediction for 2020 #1: Federal Deficit Could Trigger a Recession
Growing But Slowing Gross Domestic Product (GDP)
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 around 2 percent. Our prediction is that GDP will continue to grow but slow down in 2020 . Why the slowdown? Because of a decline in exports, uncertain domestic politics, and high national, corporate and personal debt. Each of these factors influence our nation’s GDP; but, I don’t predict a recession this year.
We expect to see consumer debt continue to increase. With a $1 trillion a year deficit, consumer debt has hit record highs of $4 trillion in 2019. Lenders look at a potential homebuyers debt-to-income ratio, as a key metric for approving or denying mortgage loans. Massive consumer debt, and a growing population, with a lack of affordable housing being built, is resulting in more renters. The big contributors to overall consumer debt includes student loan debt, the debt-to-GDP ratio, and money supply.
The Impact of Massive Student Loan Debt
The U.S. has 44 million student loan borrowers, resulting in around $1.5 trillion of debt. On average, it takes 21 years for borrowers to pay off their student loans. Back in the 1980s, just 5% of the population had student loan debt. Now, between 10% and 20% of people carry student loan debt. This is another reason a greater percentage of people are renting instead of buying. Millennials trying to pay off their student loans and improve their debt-to-income ratio to even qualify to buy a house will continue to drive the rental population upward.
The Impact of Debt-to-GDP Ratio
Are we borrowing debt that is producing enough income to pay it back? The simple answer is, no. Most creditors don’t worry until the sovereign debt is more than 77% of GDP, according the the World Bank. In the third quarter of 2019, the U.S. debt-to-GDP ratio was 107%! That’s over $23 trillion in U.S. debt, as of 2019, divided by the $21 trillion nominal GDP. Around $17 trillion of this debt is public debt, which is what the government owes to investors. Yet, American’s are still borrowing like crazy. The question remains, is this growing debt sustainable?
The Impact of Money Supply
Because we can print money at-will, the money supply has been increased substantially. Values of stocks and houses went up along with the money supply. Money supply is an important factor for real estate investors to pay attention to moving forward. We’re in unchartered economic territory. So it’s important to keep this in mind as you make your investing decisions and consider how to protect yourself in case the worst happens.
2020 Housing Market Prediction #2: Mortgage Interest Rates Will Remain Relatively Low
Fed Rate Cuts 2019
The Federal Reserve increased interest rates four times in 2018 and as a result, home sales dipped, but only slightly. In 2019, the Federal Reserve cut interest rates three times to stimulate the economy. Each time interest rates dropped by a quarter-point, finishing 2019 at 1.75%.
Fed Rates for 2020
With three interest rate cuts in the last year, the Federal Reserve has stated that it plans to hold steady and not raise interest rates. With officials moving toward a more patient outlook, we predict that rates will remain how they currently are for the rest of 2020. With interest rates so low, it’s a great opportunity for homebuyers to lock in interest rates now and keep those rates for the next 30-years with a fixed-rate mortgage.
2020 Housing Market Prediction #3: Political Climate Remains Uncertain
With a presidential election looming in the coming year, many real estate investors wonder how politics will affect housing? Historically, we’ve learned that regardless of who is in the White House, the housing market has pretty much stayed the same. Tax law changes are driving the ‘Ultra High End’ housing market, along with huge annual tax cuts mostly benefitting the top 20% of income earners. No matter what happens in November, we don’t expect politics to have much of an affect on the real estate market.
2020 Housing Market Prediction #4: Tariffs Should (Hopefully) End
The tariffs against China increased from 10 percent to 25 percent in May on about 500 items involved in new home building and renovation. The U.S. and China seem to be close to reaching a new deal to stave off tariffs. If an agreement is reached, the cost of home building materials should come down on the following items:
- Other common finishes for housing made with aluminum, steel and lumber
2020 Housing Market Prediction #5: More Jobs, Less Workers
More Jobs Than Workers
According to CBS News, there are 7.6 million job openings in the US, more than ever before. As of 2019, there were about 1 million more open jobs than unemployed workers. The United States continues to have some of the lowest unemployment rates ever, just 3.6 percent at the end of 2019. 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. That said, a strong labor force is a good sign of a strong economy.
U.S. Population Growth Rate
Between 2006 and 2016, there were 24 million new American’s. The population of the U.S. has grown since the last recession by over 25 million people. Despite massive job growth, our workforce is actually shrinking and the U.S. birthrate is at a 30-year low. Although we have a growing millennial population that is entering the workforce and forming households, there’s an even greater number of Baby Boomers that are retiring. In fact, around 10,000 baby boomers are retiring every single day in America. That said, even if we did have a recession and there were job losses, we still have way more jobs than workers. We would have to see massive job losses for it to really affect the housing market.
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.
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.
2020 Housing Market Prediction #6: More New Renters Than Owners
Of the total population, 23 million are renters and 678,790 homeowners. That’s 97% of American’s who rent. With all of this population growth, most of these people have been renters and not owners. Because of the huge millennial population choosing to rent or unable to buy, the rental market will remain strong in 2020. This is an important trend to pay attention to in the housing market.
Does it Still Make Sense to Be a Landlord in 2020?
Rental property owners should be aware that oversupply of housing is not a risk–nationally or locally. More and more people are renting instead of buying homes. As such, landlords will experience more demand for their rental properties, while those looking to buy a home will have less competition.
2020 Housing Market Prediction #7: The Housing Market Will Remain Steady, But Expect Slower Price Growth
Although we expect gains to “normalize” over the next year, the housing market remains on solid ground. The key in real estate is finding the right markets. There are still growth markets out there and The RealWealth has identified 18 markets that can produce nice returns. We know which markets are better for cashflow and which are better for appreciation. If you’d like to learn more about our 18 growth markets, check out our location spotting page.
Want to stay up to date on the latest housing market statistics? Check out Redfin’s housing market hub.
Question 1: Can the increase of interest rates put the brakes on the economy?
When the Federal Reserve raises interest rates it’s for one reason and that’s to slow down the economy. We don’t foresee any rate changes to occur in the coming year, as suggested by the Fed Reserve. On the other hand, mortgage interest rates are more tied to fear or confidence in the economy. If there’s fear, more investors buy mortgage-backed securities because it tends to be safer, in this case mortgage rates can go down. When there’s a lot of confidence in the economy, more people tend to invest in the stock market. Because there’s less demand for mortgage-backed securities, rates usually go up. Most of the economists I’ve interviewed on the Real Wealth Show do not think that interest rates will go up, at least not for the next few years.
Question 2: The government can print money at-will but individuals cannot?
It’s a massive problem because the money we print is unregulated. It’s not sustainable in the long run as inflation continues to eat away at the value of a dollar. This is why so many investors are choosing to buy real estate because it’s a hard asset, so it has value that increases with inflation. 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: Experts are saying the big reason the next housing market crash will happen will be due to pension programs going broke. Do you agree?
Yes, there’s going to be a massive pension program problem in the future. This whole line of thought is with the belief that the government will take care of you and that it has unlimited amounts of money. And that rich people have unlimited amounts of money that can pay for everyone else. This is not going to happen. This country was built upon the notion that anyone can come and take advantage of opportunities to create wealth. With pension programs unable to pay out, many retirees won’t get the pensions they worked for. The key for real estate investors here is to look for rental markets with a growing population, job growth and appreciation potential. It’s important to position yourself financially for when the storm does hit.
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 2020 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.