What do experts foresee for the 2018 housing market?

December 11, 2017

With 2018 finally here, it's important for real estate professionals to get the lay of the land and understand how the market is evolving. While 2017 was characterized by delayed interest rate increases and continued slow-but-steady growth of property values in most markets, 2018 could diverge from those trends in notable ways. Rates are expected to start approaching higher levels more in line with historical norms, while prices will probably keep growing, albeit at a slower pace.

A lack of available homes for sale - especially those with lower price tags - was perhaps the biggest real estate trend in 2017 and will likely continue to have a major impact on the market in 2018, according to projections from Zillow. As of mid-November, the latest period for which complete data was available, the inventory of homes for sale nationwide was down 12 percent on an annual basis, owing to current owners' concerns about the market and frankly incredible demand among would-be buyers, particularly millennials who want to buy for the first time.

A broad view
The problem for those first-time buyers, most of whom don't have the ability to make sizable down payments, is that more than half of all homes for sale across the country were priced in the top one-third of all property values.

These are, unfortunately, some current trends that are expected to linger, even as builders work feverishly to build the supply of starter homes to meet that extant demand, particularly with construction focused in the more affordable suburban areas.

As a consequence of all these factors, home prices are expected to increase 4.1 percent over the course of 2018, down from the nearly 7 percent growth seen in 2017, Zillow projected. Even that slower growth rate, however, is still well above the historical norm of about 3 percent.

Home sales should keep growing
Another issue encountered nationwide in the back half of 2017 was that real estate sales figures started to slow down despite the significant demand among buyers. That fact, too, can be attributed to the dwindling inventory in most markets, but the good news for real estate agents and would-be buyers alike is that this trend should reverse itself somewhat, according to data from the National Association of Realtors unveiled at a recent industry conference.

In all, the NAR expects sales of existing homes to increase 3.7 percent over the course of 2018, with about 5.67 million such properties changing hands. This prediction comes despite a projected 5.5 percent increase in median existing-home values, due largely to the fact that single-family housing starts should increase 9.4 percent over 2018.

"Despite considerable demand all year, pending sales have lost a step in recent months because low supply is pushing prices higher and making home buying less affordable in several parts of the country," said NAR Chief Economist Lawrence Yun told attendees at the 2017 Realtors Conference & Expo in Chicago in November.

It's worth noting that even with the slowing pace in the second half of last year, 2017's existing-home sales were projected to hit the highest level seen since 2006, before the economic downturn.

A more granular vision
Of course, these widespread national trends are not going to reflect what's happening in every individual metro area, and because the old saying goes "all real estate is local," it's important for agents to make sure they understand the ways their individual markets will change, according to The Street. For instance, home values are surging in many major cities, and inventories continue to dry up despite those higher prices. Meanwhile, rental costs in those places continue to climb quite sharply, which in turn can lead many renters to consider homeownership in other areas.

Home prices in most markets are likely to continue rising faster than incomes, for instance, and that possibility might be especially true for younger adults. Coupling that with rising interest rates, many people looking to buy in or near major markets like Boston, New York, Los Angeles and San Francisco could face severe difficulties in finding something affordable. That outcome could be an issue for some time to come, as older homeowners buck traditional trends and stay in their homes long term rather than putting their larger family homes on the market and looking to downsize in their golden years.

An eye on Washington
It is difficult to make broader predictions about the market as a whole because of how Congressional lawmakers' tax reform plans could end up impacting homebuying and continual homeownership plans for many Americans this year, according to the NAR and PricewaterhouseCoopers. Last year, the organizations took a look at some of the proposed changes and how they might impact the market as a whole, and the outlook wasn't particularly rosy.

Depending on the final outcomes of lawmakers' tax reform efforts, there could be a potentially sizable effect on home prices and prospective homeowners' ability to even start the buying process. For instance, with the repeal or alteration of certain tax breaks for homeowners, there might be a tertiary effect that causes values to drop by more than 10 percent in certain areas. Likewise, changing how consumers are able to write off state or local taxes could end up having a disparate effect on individual metro markets.

Potential changes to the mortgage interest tax deduction in particular could be impactful, as about 35 million homeowners were expected to claim it in 2018, and the vast majority of those people had household incomes between $50,000 and $200,000 per year (though only about 70 percent of people eligible for the write-off claim it every year).

"A tax reform proposal that hikes taxes for homeowners is a raw deal, and consumers know it," said NAR President William Brown. "Leaders in Washington who are driving tax reform have shown every indication that they have the best of intentions, and we're hopeful they'll consider our study as this process plays out in the months ahead."

Of course, all these potential changes are fluid, and market conditions are likely to shift at least somewhat over the course of the next 12 months. With this in mind, real estate agents will need to keep a close eye on their markets on an ongoing basis and have the flexibility to react to any changes that may come along.