The winds of change blasted through residential real estate in 2018. As we look ahead to a healthy and productive new year, let’s take a moment to reflect on the major events and market forces that shaped last year.
Five key factors rocked real estate in 2018. Understand these, and you’ll cash in on a successful 2019.
The rise of the iBuyers
Perhaps no single event generated more angst in the world of real estate than the rise of the iBuyers. Companies like Opendoor, Offerpad, and Zillow Offers aim to transform how we transact residential real estate. According to Offerpad’s website, they’ll send a homeseller an offer within 24 hours. If the home is accepted, they’ll pay cash within ten days.
They allow sellers to pick closing dates, skip open houses, and they even include a free local move. They make selling faster, easier and more predictable compared to a traditional sale. They also help sellers who need the cash to purchase a new home.
IBuyers like Opendoor come with some big strings. They don’t transact all homes and all locations. Their offers are lower than what one would expect on the open market. In fact, their algorithms are designed to create a spread between their offer price and the expected resale value.
They also diminish or eliminate the role of a real estate agent in the transaction, thereby reducing an important protection for homesellers. Many are concerned that without real estate agent representation, these iBuyers will take advantage of homesellers and underpay them.
One thing is for sure, they raised a lot of cash in 2018. Opendoor raised $400 million from Softbank’s Vision fund, and they’re now worth around $2 billion. Many questions remain about the long-term viability of iBuyers, especially in declining or slow markets, but they deserve our watchful eye.
Increasing interest rates
A story about real estate in 2018 wouldn’t be complete without a look at interest rates. The 30-year fixed rate started the year at 4.15 percent and reached as high as 4.86 percent in October before settling down to 4.55 percent. This rise in rates from a low of 3.42 percent in September 2016 is throwing cold water on the housing market.
In particular, it’s decreasing sales velocity as many homeowners conclude it’s better to stay in their existing home rather than pay more for a new home with an even more expensive loan. As a result, available inventory may continue to shrink. The higher rates are also pricing out many first-time buyers, as the prospect of buying and maintaining a home becomes increasingly daunting.
Mother nature was not happy in 2018. California suffered from the deadliest wildfire in history. The worst hurricane since 1969 battered the East Coast. Hurricane Florence pounded coastal North Carolina with three feet of rain, while Hurricane Michael punished the Southeast and leveled Panama City, Florida. The Camp Fire in California killed 85 people, destroyed 13,000 homes and devastated the town of Paradise.
Exception for Hurricane Katrina in New Orleans, natural disasters typically cause short-term housing volatility and long-term price increases. However, I can’t help but wonder whether it might be different now. People are more concerned about climate change, and I suspect the increased frequency of hurricanes, floods and wildfires will cause folks to rethink where they live. This year should give us a window into the future of climate housing.
The number of older people in the United States is exploding, with the elderly expected to outnumber children by 2035. Many of these folks are empty nesters. They’re selling the needlessly large homes from their working years and moving into co-living spaces, accessory dwelling units (ADUs) and condos near the urban city center.
Seniors increasingly prefer a home that’s easy to maintain, affordable and in walking distance from shops, restaurants and amenities. We see this trend taking root in 2018, and I expect it to increase as we head into 2019 and beyond.
Downward pressure on luxury properties
High-end housing was under assault in 2018. There are three primary reasons for weakness in the more expensive markets, and all should continue in 2019 and beyond.
First, the tax law made it more difficult to deduct expenses associated with pricy properties. We can already see the impact of those changes in high-end homes in New York and Illinois. Second, higher interest rates make it harder for homeowners to “move up” and buy that pricier and somewhat more desirable property.
For example, a homeowner looking for an extra bedroom as an office might decide to stay put, rather than shell out a lot of extra cash for a more expensive home with an even more expensive loan.
Finally, the flight of the elderly out of their large existing homes to smaller condos will create additional inventory in the upper end, particularly by good school districts. With the higher cost of new loans and shrinking families, there may be less demand for these larger and more expensive homes.
We’ll have to watch 2019 to see whether the trend continues with more folks leaving large suburban homes and moving to starter homes, condos and the urban cores.
I’m certain 2019 will be another wild ride, as the rise of powerful artificial intelligence, stock market instability and political change will undoubtedly reshape residential real estate. Thanks for reading, and have a happy, healthy new year.