ORANGE COUNTY HOUSING REPORT: The 2019 Forecast: A sluggish year.
The U.S. economy was strong throughout 2018. Unemployment was at record lows. The GDP was up considerably. The new corporate tax cut juiced an already hot economic landscape. But, as the year unfolded, tailwinds emerged. The Federal Reserve increased short-term rates four times. Long-term interest rates grew from 4 to 5% before receding slightly at the end of the year. Wall Street had a tumultuous ride, ending up down for the year. The trade war took center stage and became a drag on the overall economy. Finally, new home sales have been on a steep slide for the past year. 2018 was about a shifting economy. While the economy may still be strong, its strength is fading. With interest rates remaining elevated and more headwinds to come, the local housing market is not going to improve much in the coming year. Here is the forecast:
Active Inventory – the year will begin with around 5,500 homes, the highest start to the year since 2012. That will translate to a very slow start for housing. Just as in 2018, with muted demand, many homes that are marketed will linger. One out of every four homes will not find success. The number of homes that are placed on the market will not change much from prior years, but due to fewer closed sales, the inventory will rise. Expect the inventory to peak in August between 8,000 to 8,500 homes.
Demand – with elevated interest rates and values remaining near record levels, affordability will continue to be an issue, muting demand. While there will still be plenty of buyers purchasing, the numbers will continue to be subdued throughout the year. Demand will be at its strongest level during the Spring Market. The market will improve from a slight Buyer’s Market to a slight Seller’s Market during the spring with very little appreciation. Buyers will not want to pay much more than the Fair Market Value for a home. Demand will drop from the June through the end of the year. The market will quickly shift to a Balanced Market in the summer. During the Autumn Market, housing will slow to a slight Buyer’s Market. By Thanksgiving, expect local housing to shift to a deep Buyer’s Market where values drop. Appreciation will be negligible for the first three-quarters of the year before dropping between 2-3% by the end of the year.
Housing Cycle – the housing market will follow a normal housing cycle. The strongest demand coupled with plenty of fresh inventory will occur during the Spring Market. This will be followed by slightly less demand and a continued new supply of homes in the Summer Market. From there, demand will drop further along with fewer homes entering the fray in the Autumn Market. Finally, all the distractions of the Holiday Market will be punctuated with the lowest demand of the year and few homeowners opting to sell.
Closed Sales – the number of successful, closed sales will drop between 4 to 8% compared to 2018 (2018 was down 10% compared to 2017), around 26,000.
Luxury Market – luxury sales will decrease from 2018’s record by about 10%. The Spring Market will be the strongest for luxury, yet demand will still be muted. The second half of the year will be especially sluggish.
Interest Rates – there is quite a bit of pressure for interest rates to rise, from Federal Reserve short-term interest rate increases, to quantitative tightening, to low unemployment, to an overall strong economy. Yet, there is quite a bit of turmoil abroad, which breeds uncertainty. Consequently, U.S. treasuries will continue to be a safe haven as a hedge against uncertainty. These two counter forces, pressure for interest rates to rise and uncertainty, work against each other, so there will not be a lot of movement in long-term. By year’s end, expect interest rates to stretch to 5.125%.
Distressed Inventory – in 2018, distressed sales, foreclosures and short sales combined, only accounted for 1% of all closed sales, 313 total. With a slowing housing market, expect distressed sales to rise by 20%, to about 376.
The bottom line, 2019 will continue shifting away from sellers and line up more in favor of buyers. It will finally be the buyer’s turn during the second half of the year. Sellers will not get away with overpricing just as buyers will not get away with low ball offers. Sellers will have to pack their patience in 2019. Gone are the days of multiple offers and instant gratification. Instead, price will be king.
HAPPY NEW YEAR!!