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Are Home Prices Going to Surge in 2020?

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It’s a new year, and with that comes old questions, like will mortgage rates go up or down in 2020? And will home prices rise or fall?

Well, a few months ago, you would have probably thought the answer to the home price question was a no-brainer.

After so many years of seemingly unsustainable appreciation, there’d just be no way home prices could eek out more gains, let along big ones.

But that logic has just been turned on its head thanks to a new report from Zillow, which claims we’re running out of homes again.

For-Sale Inventory Hits Lowest Point Since 2013

  • Uptick in housing inventory appears to have been short-lived
  • Lowest number of for-sale homes on the market since at least 2013
  • Supply is only expected to worsen from here with little home building and lots of demand
  • Could be the recipe for even higher home prices in 2020

This isn’t the first time we’ve run out of homes, but after an uptick in inventory over the past couple years, it appeared things were turning around.

However, that “inventory bump a year ago proved to be short-lived,” per Zillow, as we now have the lowest number of for-sale homes in at least seven years.

Yes, inventory is basically back to levels not seen since 2013, and if you recall, home prices were bottoming just before and around that time.

To make matters worse, supply is supposed to get even tighter before we see any relief.

While this is pretty much excellent news for existing homeowners, who will likely see their property values continue to surge, it’s especially bad news for renters trying to get into the game.

Zillow said there were just 1,489,417 homes listed for sale in December, some 120,000 fewer than there were a year ago.

That represents a 7.5% annual drop, and the lowest total dating back to 2013, when Zillow first began collecting such data.

The company referred to the temporary inventory relief seen in 2018 as a “false dawn,” led by a stock market swoon and a jump in mortgage rates, not the beginning of a “sustained trend.”

It turned out that the stock market only surged higher, and mortgage rates have since trickled down close to record lows again.

That has home buyers chasing after whatever’s out there, meaning demand continues to outweigh supply.

Where Housing Inventory Is Down the Most

Remember, real estate is local, and some metros are experiencing more inventory constraints than others.

In fact, housing supply actually went up year-over-year in four out of the 35 largest U.S. housing markets, including San Antonio (+8.1%), Detroit (+7.6%), Atlanta (+1.8%) and Chicago (+0.6%).

Here’s where inventory has dropped the most over the past year:

  1. Seattle (-28.5%)
  2. San Diego (-23%)
  3. Sacramento (-21.7%)
  4. Phoenix (-21%)
  5. Cincinnati (-16.8%)
  6. San Jose (-16.6%)
  7. Los Angeles (-16.5%)
  8. Portland (-15.7%)
  9. Austin (-15.6%)
  10. Riverside (-15.5%)

Home values increased the most in Phoenix (+6.5%), Columbus (+5.9%) and Charlotte (+5.9%) during 2019, and fell in only two markets, San Jose (-6.4%) and San Francisco (-1%).

Inventory is down quite a bit in the Bay Area, so it might not be everything when it comes to home price gains, especially when affordability hits the ceiling. But we’ll see how 2020 plays out.

Home Price Gains May Accelerate in 2020

  • Home prices rose 3.7% from December 2018 to $244,054
  • Significantly lower than the 7.6% annual increase seen a year earlier
  • With supply and interest rates low, we could see a reacceleration
  • Especially when you factor in the wave of coming-of-age home buyers

If 2019 was the year of slowing home price growth, 2020 might be the year it kicks back into gear.

Zillow pointed out that annual rate of home value growth slowed in December, marking the 20th consecutive month it had done so.

But perhaps more importantly, the gap seen between November and December was the smallest one-month decline since home price appreciation began to slow.

And with the traditional spring home buying season just around the corner, we could see a serious jump in home prices, given this supply and demand imbalance.

Last year, home prices rose 3.7% to an average of $244,054, markedly lower than the 7.6% increase seen a year earlier.

However, the value of the U.S. housing market is now a staggering $33.6 trillion. In the 2010s alone, U.S. property values increased by $11.3 trillion, a more than 50% increase.

Roughly 14% of the gain came from new construction, while the remainder was a result of higher prices on existing housing stock.

Now it appears we might be in for even more. This speaks to how long booms and busts take to actually play out.

You always assume it’s done before it goes up (or down) another notch. Just like the stock market, which continues to hit milestone after milestone. And I believe that’s what we’re seeing here.

Once you factor in the 45 million Americans reaching the average first-time home buyer age of 34 over the next decade, it becomes pretty clear. We need more homes, and fast.

Unfortunately, it also means trouble might be brewing since housing affordability has been a concern for several years now.

That might put us at a crossroads. Either we build more homes and deal with the supply issue head-on, or financing gets “creative” again to help more prospective buyers into homes they may not be able to afford.

If it’s the latter, that bust we were worried about in 2019 could be right around the corner. Just remember, it takes a little longer than you expect to get to the corner…

Read more: When will the next housing crash happen?

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