Further price and rate increases expected in 2019 housing forecasts

Following a robust year of home sales in 2017 and a more sluggish market in 2018, housing forecasts are split on whether sales will pick up or continue to decrease in 2019. Each forecast anticipated that home prices and mortgage rates will continue to increase.

The National Association of Realtors regularly updates its predictions for the year's sales. At the organization's 2018 Realtors Conference & Expo at the beginning of November, NAR chief economist Lawrence Yun said he believed existing home sales would fall 2.9 percent from the 10-year high of 5.51 million in 2017 to 5.35 million in 2018, but increase 1 percent to 5.4 million in 2019. However, in NAR's latest pending home sales report, Yun predicts that existing home sales will fall 3.1 percent in 2018 and 0.4 percent in 2019.

Pending sales have been dropping significantly in the West, which has seen strong price increases in recent years, as more potential buyers find themselves priced out of the market. The California Association of Realtors anticipates that existing home sales will be down 3.2 percent compared to 2017, then fall another 3.3 percent in 2019.

"The surge in home prices over the past few years due to the housing supply shortage has finally taken a toll on the market," said CAR senior vice president and chief economist Leslie Appleton-Young. "Despite an improvement in supply conditions, there is a high level of uncertainty about the direction of the market that is affecting homebuying decisions. This psychological effect is creating a mismatch in price expectations between buyers and sellers and will limit price growth in the coming year."

Danielle Hale, chief economist at Realtor.com, said she thinks existing home sales will fall 2 percent in 2019 as younger would-be buyers continue to face affordability challenges in finding a home. However, she also said higher home prices will spur more homeowners to try to cash out their accrued equity, expecting double-digit inventory increases in higher-priced markets and inventory increases at less than 7 percent in most other markets.

Freddie Mac expects that the sales of all homes—existing and new construction— will fall by 1.6 percent in 2018 but grow by 1 percent in 2019. Fannie Mae had a similar forecast, predicting a decrease of 1.9 percent in all home sales in 2018 and a modest 0.6 percent increase next year.

"If new home sales are to resume growth in 2019, builders may have to shift their focus to more modestly priced homes and smaller sized homes to help offset housing affordability concerns," said Sam Khater, chief economist at Freddie Mac. "But with cost pressures pinching profitability, this will be a significant challenge."

The predictions for median home price increases in 2019 ranged from 2.2 percent to 4.6 percent. Yun initially forecast a 3.1 percent price increase at the NAR expo, but in the latest pending sales report he said he expects price growth to moderate to 2.5 percent.

Most forecasts expected the average 30-year mortgage rate to exceed 5 percent, with Fannie Mae expecting a slightly lower 2019 average of 4.9 percent. The real estate site Zillow had the greatest anticipated increase, believing rates will average 5.8 percent by the end of next year.

"Certain headwinds—including rising mortgage interest rates, higher rents, and stiff competition for housing in the most desirable areas—will only grow stronger over the next year, but that won't necessarily be a bad thing," said Aaron Terrazas, senior economist at Zillow. "A slower-moving market is likely to give more buyers a change to catch their breath and choose from a wider selection of homes that fit their preferences and budgets."

A previous Zillow survey of more than 100 real estate experts found that the largest share of respondents, 43 percent, did not expect the housing market to shift in favor of buyers until 2020 or later. Hale said she does not foresee a buyer's market within the next five years due to the low inventory of entry-level homes as well as continued increases to home prices and mortgage rates.

Despite these challenges, Hale said she expects millennials to continue to make up the largest share of homebuyers in 2019. She believes their share of purchases will be 45 percent, compared to 37 percent among Generation Xers and 17 percent among baby boomers.

The Zillow forecast expects that rent increases will pick back up as more potential buyers opt to continue renting instead of buying a home. It also anticipates that commutes will worsen as more younger buyers look for suburban homes and that a greater number of homes will be lost to natural disasters such as wildfires and hurricanes as they become more frequent and intense.