Home prices reached an all-time high in most markets in 2018. Homeowners benefitted greatly as a result, with their overall net wealth rising by a cool $1 trillion. A typical homeowner’s wealth is estimated to have reached $254,000 while that of a typical renter stood at only $5,000. Looking ahead, home values are poised to advance further in 2019, albeit more modestly. However, home sales slumped badly in the closing months of last year. Persistent sales declines are nearly always associated with dampening home prices and homes sitting on the market for a lengthier time.
Home sales had been on a steady increase from 2010 to 2017, from 4.2 million to 5.5 million for existing-home sales and from 320 thousand to 620 thousand for new home sales. The early months of 2018 were neutral, with similar sales activity as in prior months. Then came the plunge, with home sales marking a 10% decline in December compared to the year before. Sales got whacked by 15% in the West region, where home prices rose too fast too soon and made it too difficult for a middle-income household to buy. Days on market rose to 46 days compared to 30 days just one year ago, inventory started a rise of seven straight months after having fallen for 40 straight months, and home price appreciation got halved to only 3% gain in one year.
How will the critical spring home buying season fare this year: a continuing slump or a meaningful turnaround? Multiple data show definitively improving conditions. First, consumer sentiment about home buying is turning for the better. Our NAR survey of consumers had shown weakening optimism about home buying that has stretched for nearly two years. Only 34% of consumers indicated that it was a good time to buy in the third quarter of 2018 compared to 47% in early 2017. So this decline in sentiment should have been a forewarning about potentially softening home sales, even though consumer psychology can be a bit fickle about what they say versus what they actually do. The latest early read of consumer sentiment, fortunately, is showing a rebound, portending more foot traffic ahead at open houses. In fact, the number of openings of lockboxes – where a REALTOR® would access a key before unlocking a home – has been trending up. NAR’s SentriLlock data reading was measurably higher in January and February compared to the second half of 2018.
More than the softer economic data of sentiment and opening lockboxes, the hard data on the number of people applying for a mortgage to buy a home has also been on the uptick. After weak conditions of late last year, mortgage applications have picked up notably in 2019 with more consumers evidently searching for a home compared to a one year ago. In addition, the number of contract signings to buy – captured in the pending home sales index – increased 4.6% in January. Finally, the broader consumer outlook about the economy is back to near an all-time high after a brief slump. The consumer confidence index reached 131 in February, slightly better than the figure one year ago and well above the 50-year average of 93.
What caused the slump and what sparked the sudden change? Home prices were becoming unaffordable. The tight supply of inventory from multiple years of inadequate new home construction pushed the median home price to reach an all-time high of $259,300 in 2018 from $166,100 in 2011. This 56% home price gain was too much in relation the wage gain of only 18% over the same period. Mortgage rates were also not helping as they steadily trended up to above 5% for the first time in a decade.
But thankfully, the Federal Reserve changed its tune in late December. Rather than the 2 or 3 rate hikes scheduled for 2019 as was mentioned in the FOMC statement, the Fed later said it will be “patient” in 2019. That is, no further rate hikes. Quickly, the 30-year fixed rate mortgage fell to under 4.5%. A typical homebuyer would save nearly $100 per month from this change in mortgage rates. Moreover, the job market is tight and pushing up income. The latest wage gain of 3.4% is the highest in a decade. For the first time in a long time, people’s income will outpace home price growth, thereby helping on affordability.
The slump is over. Better times are ahead for homebuyers.