Why the housing market could go either way in 2018

With the first third of 2018 nearly wrapped up, the U.S. residential real estate market is finally back in full swing, and economists have more detailed statistics on how things fared the year before. The more analysis on the 2017 housing market that gets released, the more positive news continues to trickle out. A recent report from Zillow, a popular real estate listing service, revealed that homes across the U.S. sold faster in 2017 than at any point on record. On average, a home sold in 2017 was on the market for 81 days, but in some of the nation's most in-demand markets like San Francisco, Seattle and Dallas, homes could be expected to sell twice as quickly. 

This was certainly good news for anyone in the position to sell a home in 2017. But as we look ahead to the spring and summer season when the bulk of homes sales occur, the picture seems less certain. Thanks to a robust economy overall, homes are still expected to sell at a steady clip in 2018, likely surpassing the previous year in terms of total sales. However, buyers, sellers and owners will each face stronger headwinds from a variety of macroeconomic factors. This puts mortgage interest rates, price appreciation and taxes into sharper focus for the year ahead.

Rising interest rates have mixed impact

The most obvious difference between the housing market of 2018 and the year prior will be seen in interest rates on loans used to purchase homes. According to a weekly report on mortgage rate activity released by Freddie Mac April 19, the going rate for a standard 30-year fixed-rate mortgage reached the highest point in more than four years at 4.47 percent. Compared to the average rate of around 3.97 percent, that could mean an additional cost of several thousands of dollars over the life of a loan taken out in 2018 rather than 2017.

"Interest rates remain below historical averages."

In context, though, this new high water mark for mortgage rates is not expected to be a serious threat to prospective homebuyers or the real estate market in general. Economists have long expected retail interest rates to rise in tandem with the Federal Reserve's incremental hikes in its federal funds rate, the basis for interest rates set on consumer loans for cars, credit cards, homes and more. As economic activity improves and employment remains strong, it's less likely that slightly higher rates will impact Americans who are already planning to buy. A survey of 4,000 recent homebuyers and sellers conducted by Redfin found that the vast majority would not change their minds about buying a home if the average mortgage rate surpassed 5 percent, which it is expected to do by 2019.

Millennials want to buy, despite high prices

If rising interest rates won't have much of an effect on purchase activity, the supply of homes available for purchase certainly will. For the last few years in popular markets, this has already been an issue. Unfortunately, it's one that doesn't show signs of significant improvement in 2018. 

Neil Irwin of The New York Times explained that strong home sales activity in recent years has obscured a more troubling trend: Young adults who want to buy their first home or move into a better one, but can't due to financial constraints or a basic lack of available housing in their price point.

HomeownersYounger Americans are having difficulty finding a home in the right market and price range.

Millennials, the demographic label for those in their mid-20s and 30s, have proven generally enthusiastic about purchasing real estate and continuing to do so throughout their lives, contrary to some reports that they tend to prefer long-term renting. But now that they are finally in a position to do so, having been sidelined by the global recession that may have stunted their potential to accumulate wealth early, millennials continue to face challenges in the housing market.

"The rising demand [for housing] has not been accompanied by increase in supply," Irwin wrote. "Builders started work on 1.3 million new housing units in 2017, which is up a lot from the depressed levels of the 2008 recession but still below the 1.5 million average between 1959 and 2007."

The availability and affordability of starter homes in mid-market U.S. cities has proven particularly concerning. A report from Freddie Mac found that between 2016 and 2017, the median list price for a starter home in several markets increased at a rate much higher than the national average. While U.S. home prices overall rose by around 7 percent during this period, entry-level homes in Salt Lake City, Utah, became 31 percent more expensive. Other metropolitan areas like Fort Worth, Texas, San Antonio, Texas, and Nashville, Tennessee, saw the median price for a starter home increase by 25 percent or more between 2016 and 2017. For buyers, that translate into an additional 5 to 9 percent of income required to buy what could be their first house.

The road ahead for homeowners

Americans who already own a home and aren't looking to sell anytime soon might not be concerned about these developments, and may even be optimistic after years of good fortune. Thanks to continuous growth in home value across the board, home equity is now at its highest level ever in the U.S., according to the Freddie Mac report. That means the majority of homeowners who weathered the market downturn 10 years ago now stand to benefit from their investment, either through a sale or by using a home equity loan.

Of course, the benefits of rising home values have not been equally distributed among owners. Freddie Mac noted that at the national level, median home prices have risen 37 percent since 2009. On a state-by-state basis during this same timeframe, median prices rose by more than 60 percent in places like California and Colorado, but only 3 percent in Delaware, for example. Home equity accrues much more slowly when real estate values do not rise as well.

The takeaway for homebuyers, sellers and owners this year? Stay the course, and continue to read the latest updates on the housing market as new trends emerge.

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