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Is There Any Chance Home Prices will Fall?
From San Francisco to Los Angeles to Denver and Seattle all the way east to Chicago, New York and Boston, homebuyers are asking when will house prices drop? See the housing forecast pages for the 5 year outlook. The chart below shows house prices will only fall during a major recession.
A Hope and a Prayer for Lower Home Prices
Unfortunately the answer is that in most US and Canadian cities, house prices will not fall anytime soon. The recent plateauing of house prices was a reflection of politically-induced economic worries and some corporate spending holdbacks. Sellers know they can hold on for even better returns in 2020 and the years ahead.
It’s more than just strong job numbers and good demographics. Let’s not forget that many homeowners won’t sell because they have nowhere to go. Consider what you would do if you were a baby boomer considering selling. If there are no homes for sale, or apartments built, why would they sell their home? The housing crisis in influential.
And persistent land restrictions are making new supply highly unlikely.
Is the Real Question How High Will Home Prices Rise?
As unemployment stays near historic lows, wages rise, GDP regains momentum, immigration continues, and as construction starts do not keep pace, house prices can only rise in the major metros in 2020 and beyond.
In fact, it may be most experts and economists may be in denial about how strong the economy can get starting in 2020. If the Democrats are the wet blanket, their efforts to slow the economy will keep housing starts down and thus push home prices higher.
When will the housing market crash? Perhaps when the Democrats reclaim the White House.
In fact, experts are changing their tune quickly about the economy of 2020 for both the US and Canada. The gurus are dropping the 2020 recession rhetoric as the stock market surges to new records, US consumers keep spending, and a trade deal might be signed. The positives which can read more on below, keep piling up.
This graph below from FRED helps us see how ineffective previous mild recessions were in reducing home prices.
Certainly the financial crisis hit us all hard, but notice the gradual, halting climb since 2013. That shows a more managed market that won’t form a bubble. It appears to be heading a long increase until there is simply no more demand. Perhaps in 2025, we might see it decline.
Robert Dietz, chief economist for the National Association of Home Builders cites a “perfect storm of supply side challenges.” In an interview, he said the residential construction industry is grappling with a prolonged labor shortage and a scarcity of buildable land.
Freddie Mac in its recent report Freddie believes the housing market will continue to strengthen with home sales growing to 6.0 million by Dec 31, and then grow 6.1 million for 2020. Sam Khater, Freddie Mac’s Chief Economist says “ the housing market remains on solid ground with housing starts, building permits, existing home sales, and new home sales all outperforming the broader economy.”
Low interest rates plus government stimulus is continuing too and there is not enough housing. That would give sufficient reason to suggest house prices will not drop. And lower mortgage rates means higher buying power for homebuyers.
Sales of lower priced homes in the West dropped considerably because the scarcity of those properties (Will Los Angeles home prices fall?). Supply of homes have dropped from 4.4 months last January to 3.9 months supply in September.
Building Permit Forecast
Building permits are much higher than last year at this time, although they seem to be dropping recently as depicted in the graphic below. The actual drop of 2.7% in Sept was much less than forecast (-26% consensus). The question is whether this uptrend of permits is going to satisfy the insatiable demand in cities such as Dallas, Phoenix, Houston, Miami, New York, Boston, Seattle, San Jose, San Francisco, and Los Angeles.
Bidding wars rose to 11% of offers in September, just up from August’s 10%, but this is well down from last September’s bidding war rate of 41%. But we should remember the tariffs imposed by President Trump and resulting fall back in corporate Capex spending is what caused that.
With those issues resolves, what’s stopping a return to 41% level bidding wars across the nation?
2019 was not really a good year for a number of reasons. However, with persistently low mortgage financing, buyers showed a strong urge to buy homes. And now it seems, according to the last report, more young first time buyers can afford to buy. Notice the strong upslope in sales throughout 2019. If the new trade deal is signed and adhered to, and the new USMCA deal is signed, it can only give the stock market and housing market a big boost. Yet without sufficient increases in housing stock, prices might rocket in 2020 and 2021.
The 2020 election is a big factor as well. Bloomberg reports that Trump will win next fall if the economy continues strong. That makes the 2020 housing market forecast kinda rosy.
It’s the same in Canada as heavy demand is growing home prices and rent prices in Toronto and Vancouver. Demand is spreading outward into rural areas where very little housing is being built. The commitment to construction of affordable housing simply isn’t there, and demand for homes $200k to $300k continues. In Toronto for instance, housing supply is drying up severely setting the stage for huge jumps in prices, creating bubble like conditions. Some are warning of danger in the Toronto housing market. Yet Toronto’s economy is hot, which will only fuel big price hikes thorugh 2020.
It’s same situation in US cities, except US buyers have much more money.
As discussed in the most recent housing market forecast and update, prices rose for the 91st straight month. The median price for existing-home of all housing types in September was $272,100, up 5.9% from 12 months ago ($256,900). Prices rose in all regions.
The political and media mood in the US has been very negative as well. If the constant stream of down talking of the economy, trade, and housing ends, we can expect and additional boost just on optimism.
For a fall/winter economy, this one seems to be excellent.
According to NAR, total houses available for sale at the end of September was 1.83 million units. That’s the same as August but is down 2.7% from 1.88 million units one year ago.
Zillow’s Home Price Forecast 2020
NAR recently said that if this recession happens, it will be short lived and that the housing market would not follow an economic plunge.
“I don’t think we’ll get back all the way to … the frenzy we saw at the beginning of 2018,” says Chief Economist Danielle Hale of realtor.com®. But “it’s certainly a possibility that home sales and prices will pick up, especially if mortgage rates stay low.”
When will home prices actually drop? A conservative guess would be in 5 years when buyer demand is satiated and the economy cools.
If the Democrats can impeach their rival, and beat the Republicans in the 2020 election, we might see a drop in prices. But the experts have said that even if the Dems ruin the economy, it wouldn’t be enough to ease demand for housing.
Don’t bet on house prices dropping in the United States anytime soon. And a housing crash? Come on.
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