We all know last year was a seller’s market in residential real estate. Supply has been low and housing starts are down 1.4 percent year-over-year, which has lead to increasing home prices and a reduction in the total number of homes sold.
The upshot is that total revenue has remained flat: Fewer sales were made, but the sales that were made came at higher price points.
What is the housing market doing now?
New residential home sales dropped 8.9 percent in October, falling to a new two-year low, according to a new residential sales report released Wednesday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD).
Scars from the housing market crash a decade ago haven’t fully healed, and already some question whether high prices and low sales are the forerunners of another deflating bubble. But our research and indicators show that the soft activity in 2018 has more to do with rising costs from record-high lumber prices and rising interest rates, forestalling the entrance of would-be buyers in the market.
Stricter lending rules are limiting the pool of new buyers at these higher price points. Supply is also severely constrained by the lack of available contractors to build more homes as job openings across the U.S. soar toward record highs, and unemployment remains at a 20-year low.
Handling growth ahead
The key to turnaround will be ongoing wage growth, which will drive demand for new homes at all price points. Affordability will hinge not on dropping home prices but rather in the rise of wages.
With wages rising in 2019, there should be industry-wide, year-over-year growth in home sales, which is a welcoming sign and should relieve any anxiety about a real estate industry bubble.
The key question is how real estate professionals can prepare for growth in activity. This begins by accurately forecasting the market in 2019. It will be important to watch the following three indicators in the next six months: existing home sales, housing units authorized but not yet started and real disposable personal income.
1. Existing home sales
Existing home sales climbed 1.4 percent in October from September. Despite the monthly gain, existing home sales were still down 5.1 percent year-over-year, according to the latest data from the National Association of Realtors (NAR).
“After six consecutive months of decline, buyers are finally stepping back into the housing market,” NAR Chief Economist Lawrence Yun said. “Gains in the Northeast, South and West — a reversal from last month’s steep decline or plateau in all regions — helped overall sales activity rise for the first time since March 2018.”
This is the weakest indicator for the industry right now. Fewer people are buying homes in 2018, but we’re confident this indicator will be different a year from now so long as the consumer is healthy and wages continue to grow.
2. Housing units authorized but not yet started
This is a very positive indicator right now. As I mentioned earlier, the limited inventory in the U.S. has led to inflated price points. There are nearly 170,000 residential units ready to be built, which is the highest level reached in a decade. Once these homes hit the market, there will be a needed growth of inventory, which should spur sales.
3. Real disposable personal income
This is not a typical indicator for the real estate industry, but with housing affordability playing such a pivotal role in this current climate, real disposable personal income has jostled into the forefront of leading indicators for the real estate industry. Seeing a rise in wages would serve as a boost to new home sales and new home construction.
The key for the industry will not only be about whether the housing supply grows but also about whether the consumer is in a place to actually afford a new home.
Industry professionals must focus on whether or not the consumer is employed and if their wages are growing, which would render homes affordable even in the face of other counteracting factors, such as rising interest rates and high lumber costs.