The U.S. unemployment rate is at a 50-year low, and consumer confidence remains high. In fact, the University of Michigan’s latest Surveys of Consumers found that Americans have their most positive personal finance outlook since 2003.[1]
However, if you follow national news, you’ve probably heard speculation that we could be headed toward a recession. Global trade tensions and a slow down in the GDP growth rate has sparked volatility in the stock market, leading to economic uncertainty.
Given these differing signals, you may be wondering: How has the U.S. housing market been impacted? Where is it headed? And more importantly … what does it mean for me?
MORTGAGE RATES ARE NEAR HISTORIC LOWS
In August, Freddie Mac reported that the average 30-year fixed mortgage rate hit its lowest level since November 2016, falling to 3.6%, down a full percentage point from a year earlier.2 Variable mortgage rates also fell when the Federal Reserve cut interest rates at the end of July for the first time since 2008.[3]
This was welcome news for many in the real estate industry. Freddie Mac predicts that low interest rates and a robust job market will help the housing market remain strong despite the threat of recession.
“There is a tug of war in the financial markets between weaker business sentiment and consumer sentiment,” said Sam Khater, Freddie Mac’s chief economist. “Business sentiment is declining on negative trade and manufacturing headlines, but consumer sentiment remains buoyed by a strong labor market and low rates that will continue to drive home sales into the fall.”[2]
What does it mean for you?
If you’re looking to buy a home, now is a great time to lock in a low mortgage rate. It will shrink your monthly payment and could save you a bundle over the long term. Or if you plan to stay in your current home for a while, consider whether it makes sense to refinance your mortgage at today’s lower rates.
PRICES CONTINUE TO RISE AT A MODEST PACE
According to the S&P CoreLogic Case-Shiller Indices, housing prices continue to rise. But the rate at which prices are rising is slowing down. For May 2019, the National Home Price Index rose by 3.4%, down from 3.5% the previous month.[4]
Of course, national averages often don’t present the whole picture. Some markets have seen modest declines, while other areas are witnessing double-digit increases. The key differentiating factor in most cases? Housing affordability.[5]
Since 2012, home prices have increased at about three times the pace of wages, according to National Association of Realtors chief economist Lawrence Yun.6
“Housing unaffordability will hinder sales irrespective of the local job market conditions,” said Yun. “This is evident in the very expensive markets as home prices are either topping off or slightly falling.”[5]
But what about all this talk of a recession? Will we see housing values plummet like they did in 2008? Economists say no.
If we look at history, the real estate crash experienced during the Great Recession isn’t typical.
The recent Housing and Mortgage Market Review report from Arch Mortgage Insurance provides data to support this. “What we found is that the next recession is likely to be far less severe on the housing market than the last one. It’s not that this time is different; it’s that last time was really different from historic norms.”[6]
“A large decline in national home prices is unlikely in the next recession,” Arch economists write. “A persistent housing shortage should help cushion home price declines.”[6]
What does it mean for you?
If you have the ability and desire to buy a home now, don’t let the threat of a recession hold you in limbo. The market is cyclical, and it will experience ups and downs. But over the long term, real estate has consistently proven to be a good investment.
LA HOME PRICES SMASH ALL-TIME RECORD – AGAIN
Home prices in LA County surged to $635,000 in July, shattering an all-time record for the second month in a row.
The county’s median sale price rose 2.8 percent since June and a full 5 percent since July 2018, a new report from real estate data tracker CoreLogic shows. That was the largest yearly gain since November.
CoreLogic analyst Andrew LePage says in a report that the bump in prices may be due in part to falling mortgage interest rates, which have reduced monthly costs for homebuyers who aren’t making all-cash purchases.
Across all of Southern California, sale prices rose 2 percent year over year. But LePage points out that average mortgage payments dropped 7 percent in the same time period due to declining interest rates.
In Los Angeles, home price increases continue to be accompanied by sluggish sales. Last month, 6,965 homes sold countywide—exactly one fewer than in July 2018, despite the fact that this year the month had one additional business day for sales to process.
Across all of Southern California, sales during the month were 2.9 percent below average (excluding the bubble years leading up to the 2008 Great Recession).
In LA County, median sale prices eclipsed the $600,000 mark for the first time in May 2018. LePage says that how high home values grow will probably be determined by a combination of “mortgage rates, buyer confidence, job and income growth, and inventory levels.”
Though many economists expected mortgage interest rates to climb in 2019, they’ve instead dropped, creating a lending environment favorable to buyers—but also encouraging price growth. LA’s median sale price in July was a full $17,000 higher than a month before.
What does it mean for you?
Whether you’re in the market to sell or buy, higher sales prices and lower interest rates can put more cash in your pocket.
STARTER INVENTORY REMAINS TIGHT WHILE LUXURY MARKET SOFTENS
As we’ve seen in the past, it’s become a tale of two sectors.
The low-end of the market remains highly competitive as buyers compete for affordable housing. A lack of new construction during the last recession led to an undersupply of starter homes. This trend continues—despite growing demand—due to a lack of skilled workers, rising land and material costs, and a slow permitting process in many areas.[7]
The result? There’s a shortage of homes for sale that Americans can actually afford to buy.
The luxury market, on the other hand, has softened. Economic uncertainty, changes to tax laws, and rising prices have slowed demand. Plus, to recoup their higher costs, builders flocked to this segment—causing an overabundance of supply in some areas.
“If you’re selling an entry level home, you’re probably still looking at a pretty competitive market in most places,” according to Danielle Hale, chief economist at Realtor.com. “But if you’re selling a more expensive home you probably have to adjust your expectations.”[8]
What does it mean for you?
Move-up buyers, you’re in luck! If you’re ready to trade in your starter home for something more luxurious, you may get the best of both sectors. We’re still witnessing strong demand for entry-level homes, giving sellers the upper hand. At the same time, buyers of high-end homes are finding a greater selection (and more negotiating power) than they’ve had in years.
INVESTORS ARE BUYING HOMES AT RECORD LEVELS
There’s one group that hasn’t been slowed down by lack of affordability or economic uncertainty: investors.
According to CoreLogic, investors are purchasing homes at a record pace. In 2018, the share of U.S. homes bought by investors reached 11.3%—the highest level since the company began tracking nearly 20 years ago.[9]
Notably, this increased activity wasn’t led by institutional investors, but instead by small and individual investors focused on the starter-home segment.[7] Declining interest rates and an uncertain stock market has led investors to flock to real estate as they seek out greater stability and higher returns.
“With declining mortgage rates … they’re searching for a better return for their money,” said NAR chief economist Lawrence Yun.[10]
What does it mean for you?
If you’re looking for a way to “recession proof” your money, you might want to consider investing in real estate. People will always need a place to live, and (unlike the stock market) a rental property can provide a steady source of cash flow during uncertain economic times.
WE’RE HERE TO GUIDE YOU
While national real estate numbers can provide a “big picture” outlook, real estate is local. As local market experts, we can guide you through the ins and outs of our market and the issues most likely to impact sales and home values in your particular neighborhood.
If you have specific questions or would like more information about how market changes could affect you, contact us to schedule a free consultation. We’re here to help you navigate this shifting real estate landscape.
Sources:
University of Michigan Surveys of Consumers – http://www.sca.isr.umich.edu/
CNN – https://www.cnn.com/2019/07/31/business/fed-rate-cut-july-meeting/index.html
S&P Dow Jones Indices – https://us.spindices.com/documents/indexnews/announcements/20190730-965771/965771_cshomeprice-release-0730.pdf?force_download=true
National Association of Realtors – https://www.nar.realtor/newsroom/metro-home-prices-increase-in-91-of-metro-areas-in-second-quarter-of-2019
CNN – https://www.cnn.com/2019/08/09/economy/mortgages-home-buyers/index.html
CoreLogic – https://www.corelogic.com/blog/2019/06/special-report-investor-home-buying.aspx
Fox Business – https://www.foxbusiness.com/economy/investors-snapping-up-homes-at-record-levels