After several years of above average economic and home price growth, 2018 marked the beginnings of a slowdown in the residential real estate market. However, the characteristics of this approaching downturn indicate a market correction, not a bubble-burst, as some fear.
Sales started to slow late last summer as we breached affordability limits and some more homes came on the market. In 2019, I anticipate that home sales will rebound modestly and rise slightly.
I also anticipate that prices will continue to rise but at a slower rate as we move toward a more balanced housing market. I’m forecasting the median home price to increase by 3 percent as rising mortgage rates will act as a headwind to home price growth.
The level of new construction remains well below the long-term average. Builders continue to struggle with land, labor, material and regulatory costs. These challenges are not likely to be solved in 2019. The constraints are preventing the inventory boost we need to meet the substantial demand by first-time buyers for detached single family homes at the median sales price in Eugene-Springfield of $291,000.
There are still voices out there that seem to suggest that another housing bubble is forming, or in some cases, is already deflating. I don’t see this happening. Credit quality for new mortgage holders remains very high and the median down payment (13 percent of the home price nationally in 2018) is at its highest level since 2004. Today’s lending practices and requirements have been shorn up, eliminating marginal buyers from the buying pool.
That is not to say that there aren’t several markets around the country that are overpriced. Recent concern has surfaced regarding the affordability of Lane County housing when evaluated based on wages and cost-of-living ratios. But just because a market is overvalued does not mean that a bubble is in place. It simply means that forward price growth in markets like ours will be slowed to allow income levels to rise sufficiently.
Challenges, opportunities
First-time buyers made up 33 percent of home buyers nationally last year. I expect the percentage of first time buyers to continue to be strong and possibly to increase if potential buyers recognize that affordability hurdles could put home ownership out of reach if they don’t act soon.
The step-up, or expansion buyer, has some advantage because the market softens (relatively speaking) as prices go up. This seller/buyer will enjoy the strongest sellers’ market as a seller, maximizing the sale. With money in hand, this seller-now buyer enters a mid-range homes market ($450,000 or more) that has less of an inventory squeeze and fewer competing buyers.
If it is your intention to right-size your personal residence by selling and then buying in 2019, the benefits of a strong sellers’ market will be offset by the challenges of buying your replacement home. I encourage these consumers to have a strong buyers’ advocate by their side to assist in navigating the sell buy labyrinth. It is critical to clients with whom I work that I look at the purchase with an eye toward the future resale of the home; I provide independent analysis of the current value as well as identify features of the home or surrounding area that might limit the appeal to future buyers when they go to sell the home.
Today’s sellers may be surprised by the buyers’ restraint in negotiations, illustrating their determination to ‘not overpay’ in 2019. And buyers may get frustrated with the sellers’ confidence in their perceived value of their home.
In order to move successfully in 2019, recognize that every successful home sale requires agreement from both buyer and seller. In this market, both sides of the transaction will be best served by seeking to understand the priorities of the other.