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Has a Housing Downturn Commenced?

InventoryA housing downturn has begun, according to researchers at Trulia. However, there’s no need to panic—this downturn will likely emerge quite differently from the one a decade ago, the researchers say.

What’s signaling the current downturn beginning to take shape is primarily declining sales volume. This is typical of housing downturns. First sales decline, then prices follow a year or two later, said Trulia economists Issi Romem and Cheryl Young in their recent outlook.

Sales volume growth began to slow in 2014, plateaued in 2016, and then began to fall in spring 2018. For the past several years, sellers have had the upper hand in an inventory-starved housing market, but this is beginning to change.

“Housing market indicators such as days on market (which have finally stopped declining), inventory (which is finally building up), and price cuts (which are growing more common), all indicate that sellers are facing greater difficulty in selling,” Romem and Young said.

The housing downturn is most evident in the formerly hottest markets such as Seattle, San Francisco, and in Southern California. In contrast, the East Coast and parts of the Midwest are not yet cooling. Sales in New York and Kansas City, for example, are still growing.

The reason for the emerging downturn in the housing market can be largely chalked up to timing. Cyclical downturns typically take place every 10 years, so it’s about that time.

However, “the downturn we’re entering is inherently different from the previous one that saw home values plummet over 40 percent, and is likely to be mild,” according to the economists.

One major difference between today’s market and the market leading up to the previous housing downturn has to do with inventory. In recent years, the housing market has had low inventory, which has pushed up prices and given sellers most of the negotiating power. With home sales slowing, inventory should slowly begin to increase.

Leading up to the previous housing downturn, we experienced “record-breaking rates of residential construction,” according to the researchers. In contrast, construction has been and remains suppressed today. We are unlikely to see a flood of inventory, but rather a slow, small increase over time.

As such, changes in prices should also be mild and gradual, the researchers say. In fact, the current downturn may eventually bring prices down slightly, or it “could merely involve only a prolonged period of slower price growth.”

In other words, this so-called downturn will be far less dramatic than the last.

One factor that could put additional downward pressure on prices is consumer sentiment. Trulia reported the share of consumers who say this year will be a better year for home sellers than for home buyers is beginning to decline.

When outlook leads to action, the market can be impacted.

“Housing market shifts have an element of self-fulfilling prophecy: if enough people believe prices are peaking then sellers hurry, buyers hold off and prices fall,” the economists explain.

In the near term, buyers can expect a little more negotiating power and sellers slightly less. Prices will likely continue to rise this spring, and affordability will remain an issue in many markets for now, Trulia predicts.

About Author: David Wharton

David Wharton, Editor-in-Chief at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has nearly 20 years' experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. He can be reached at [email protected].

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