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Realtor.com: Housing market likely to decelerate in 2020

‘Tis the season in the mortgage industry — the forecast season, that is. And one prediction from Realtor.com anticipates the U.S. housing market continuing to slow in 2020, with inventory bottoming out and affordability taking more of a hit.

Realtor.com’s forecast comes despite generally rosy current conditions for the home-purchase market, with low interest rates and consumers showing an eagerness to spend. Qualifying for a mortgage in 2020 could even be easier on paper, Realtor.com added, due to stabilizing home prices and the favorable rate environment. Mortgage rates are expected to reach 3.88% by the end of 2020, with price appreciation for existing homes moderating to 0.8% annually.

Even though some observers expect inventory relief through increased new-home construction, supply constraints that have persisted since 2005 continue to present strong downward pressure. Realtor.com expects this to dent an otherwise strong market.

“Housing remains a solid foundation for the U.S. economy going into 2020,” said George Ratiu, senior economist for Realtor.com. “Although economic output is expected to soften — influenced by clouds of uncertainty in the global outlook, business investment and trade — real estate fundamentals remain entangled in a lattice of continuing demand, tight supply and disciplined financial underwriting. Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford, but rather what they can find.”

Realtor.com expects existing-home sales to fall by 1.8% in 2020 as inventory drops to an historic low point, due to a steady flow of demand coupled with declining seller sentiments. Ongoing concerns over the uncertain U.S. economy will give baby boomers little incentive to sell in 2020. And even though Generation X is more likely to upsize and boost the supply of starter homes, it’s likely that they won’t do so fast enough to offer adequate supply reinforcement.

These inventory issues will continue to hurt first-time buyers the most, with the biggest shortages occurring at the lowest price tiers. Construction of new homes in 2019 was largely concentrated at higher price points, offering little relief for entry-level congestion.

It’s not great timing, given that millennial demand is projected to reach new heights next year. For one thing, the largest cohort of millennials — which numbers 4.8 million — will turn 30, squarely within the prime homebuying window. The oldest members of Generation Y, on the other hand, will turn 39, a turning point where many go from cities to suburbs in search of a more family-friendly lifestyle.

Because of this, Realtor.com expects millennials to account for more than 50% of all mortgage originations by spring 2020, reinforcing their spot as the top dog among home loan borrowers. Effectively, Realtor.com reported, millennials will outnumber boomers and Gen Xers combined in their shares of the home-purchase market.

Geographically, the impact of high home prices on the coasts will continue to encourage buyers to move inland and toward metro areas that are both family- and wallet-friendly. Cities in Arizona, Nevada and Texas, for example, will continue to benefit as safe havens from California’s sky-high prices. Buyers fleeing expensive Northeast markets will continue to eye cities in Georgia, Florida and the Carolinas, while Midwest markets will remain attractive given the high affordability and healthy, diversified economies in Ohio, Indiana and Kansas.

Finally, next year’s election presents a wild card, with the presidency, 35 Senate seats and 435 House seats up for grabs. November 2020 will be closely watched for its potential impact on business optimism, consumer confidence and spending patterns. And although the outcome of the presidential election isn’t directly tied to housing activity, geopolitics are becoming further intertwined with the nation’s economy. The policies of the Oval Office’s next occupant figure to be a key story in 2020.

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