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The Housing Market’s Rebalancing Act

The housing market took a turn in the second half of 2018 with declining home sales, decelerating home price growth, and sluggish new home construction alongside rising mortgage rates. We can expect the housing market to continue on this new trajectory, for the most part, this year and are likely to see some rebalancing in some of the markets with the most extreme conditions, according to BBVA Compass’s U.S. Housing Outlook 2019.

After peaking in 2017, home sales have slowed. BBVA Compass attributes this slowdown to lower supply and demand due to a combination of factors such as declining affordability and rising mortgage rates discouraging homeowners from selling.

As millennials age and form new households and families, they will be a strong source of demand this year. Many millennials will be straying from urban centers and toward the suburbs. However, single-family housing supply will remain tight until Baby Boomers begin downsizing in greater numbers or new construction picks up.

“Since tight market conditions in the existing homes market will remain in place, and construction will increase only slightly, we expect existing home sales to remain close to their current levels, with a gradual downward trend,” BBVA stated in its outlook.

As of November, the housing market held 4.1 months’ supply, still well below the threshold of six months’ supply that marks a balanced market. At the most extreme, Oakland, California; and Tacoma, Washington, held just 1.7 months’ supply.

Just like sales, home prices have slowed in the second half of 2018. Home prices increased 5.1 percent over the year in November, down from 6.6 percent in March and April. Despite the slowdown, only 16 of the largest 80 metropolitan statistical areas posted home price appreciation slower than 5 percent as of November.

Home price growth will likely “remain solid” this year, according to BBVA, and will likely continue to outpace inflation.

New home construction should increase “slowly” this year, and multifamily construction should “stabilize at the current levels.”

Mortgage rates have risen and will likely rise a little more, putting pressure on affordability. The 30-year, fixed-rate mortgage rate landed around 4.5 percent at the end of the year, according to BBVA, and is likely to “stabilize around 5% in the short- to mid-term.” The good news there is that “more than one-half of the impact of interest rate increases has already been absorbed by the market,” BBVA stated.

Overall, we can expect the shifting housing market to “balance some of the regional disparities built up over the last decade,” BBVA stated.

Already markets where prices are at their most extremes—either far outpacing economic fundamentals or lagging fundamentals—are beginning to realign, according to BBVA.

“This regional rebalancing is positive and will contribute to the sustainability of the housing market in the long run,” BBVA stated. “We expect this trend to continue in 2019.”

The outlook is largely positive for markets that are attracting knowledge workers and millennials forming new households or upgrading as their families grow. On the other hand, housing markets in smaller metros and rural areas may struggle.

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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