MReport July 2019

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18 | TH E M R EP O RT COVER STORY horizons fell relative to last year. It revealed that the mean one-year ahead expected change in home prices in 2019 was 3.6%, over a percentage point below last year's 4.6% and the second-lowest level since the inception of the survey in 2014. Five-year growth expecta- tions average 2% per year, almost a full percentage point lower than last year. A CoreLogic forecast also re- cently projected a 4.8% appreciation of home prices nationwide in 2019 and while many states and metros would see solid appreciation rates, "many others will experience significant slowdowns for the first time in over seven years." Interestingly, the forecast revealed that cities with a "wide array of amenities, active lifestyles, and good career opportunities," would likely continue to perform well over the next few years. The cities that would experience a decline in home price growth through December 2019 were spread out across the Northeast and Midwest in areas such as New Jersey, Virginia, New York, North Carolina, Pennsylvania, Colorado, and Texas. However, one market that is already feeling the pinch of soft- ening home prices is California. According to Khater, it has cooled down the most over the past year, primarily because it was an expensive housing market. "California experienced rapidly growing price appreciation, and when rates increased, it meant the monthly payment increased by 15-20% in one year, which caused the market to experience a decline in sales, a rise in inventory, and a deceleration in home price growth," he explained. Another reason why these mar- kets have cooled somewhat, ac- cording to Palim, is to avoid what "Alan Greenspan called (in another context) 'irrational exuberance.'" "In general, market forces often cause short-term house price ap- preciation rates to revert to a long- run average, and that's likely what we've seen recently," Palim said giving the example of markets like Seattle where home price apprecia- tion had averaged more than 12% per year from Q2 2012 to Q1 2018. Similarly, in San Jose, Portland, and Denver, the average rate over the same period was more than 11% per year. "By contrast, we haven't seen much cooling in Gary or Wichita, but over the same six- year period house prices increased by an average of less than 5% per year in each city," Palim said. According to Sarah Mikhitarian, Senior Economist for Zillow, these previously hot mar- kets have even experienced small monthly declines in home values for the past few months. "It's a natural price correction following explosive home price growth that outpaced incomes, causing potential buyers, who could no longer afford the down payment, to bow out of the market," Mikhitarian said. "Prices are still high and these are by no means buyer's markets, but it's a stark difference from the extreme seller's markets from the past couple of years." For investors, Kapfidze said, some of the best cities where monthly mortgage payments were lower than monthly rents includ- ed Miami, Orlando, and Virginia Beach. But, he warned investors looking for price appreciation would need to be wary "as some previously high flying metros are seeing price growth slow, in particular, in high-tech cities on the coast like San Francisco and Seattle." However, according to Kapfidze, while these high-tech cities on the coasts are cooling, there is something in the air which may change this trend. "The raft of tech IPOs like Lyft, Pinterest, and Uber will mean many employees and investors in these companies could cash out, this may put some momentum back in these markets in the second half of the year," he predicted. Homebuyers, especially those looking for starter homes are not out of the woods. "Consumers most often cite high home prices as a top concern," Palim said. "Additionally, they are less likely to attribute homebuying pessimism directly to tight inven- tories, perhaps because inventory levels may not be as obvious to the vast majority who are not actively looking for a home." Supply Shortage A Zillow study found that start- er homes have gained 57.3% in value over the past five years, while inventory in the bottom third of the market has fallen 23.2%, creating a shortage of affordable homes for first-time buyers. "The potential first-time buyer bulge, without inventory to meet it, suggests that the typical age of first-time buyers will continue to be pushed further and further out," Skylar Olsen, Director of Economic Research at Zillow noted in the study. "The rate of single-family construction is still behind the pace we experienced in the 1990s, and without an increase in truly new supply, would-be first-time buyers will in- stead persist in the rental market." According to Kushi, demand for homeownership is likely to peak over the next three to five years as most millennials born in 1990 (the peak year for millennial births) enter the homebuying age. "However, the existing supply shortage—the trend that char- acterized 2018—remains a factor in 2019, inviting the question as to whether the market is ready for rising millennial demand for homeownership," she pointed out. "While the supply shortage appears to be easing in some mar- kets, it is largely among higher- end homes. The supply-demand gap will likely continue into the second half of the year as millen- nial demand continues to grow, and supply for starter homes lags." Palim agreed. "Recently there has been limited inventory within the lower priced tiers, and home price growth has been more rapid com- pared to homes in higher priced tiers. Home price growth has also outpaced wage growth, making affordability a growing concern for all homebuyers," he said. However, according to Mikhitarian some of the recent signs in housing supply have been "The raft of tech IPOs like Lyft, Pinterest, and Uber will mean many employees and investors in these companies could cash out, this may put some momentum back in these markets in the second half of the year." —Tendayi Kapfidze, Chief Economist for Lending Tree.

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