2020: Real Estate Industry Outlook

To get a better feel for the direction of the real estate market, stakeholders must always view cause and effect through a few different lenses. In an interconnected global economy, movement in the U.S. market will partially hinge on the big-picture or macroeconomic environment driven by factors that include international trade policy. Among other circumstances, the tariff war between the United States and China has prevented U.S. monetary policymakers from applying any fiscal damper to the economy in the past year.

The Federal Reserve sees evidence of a slowdown in business investment and in somewhat of a philosophical turnabout, has consequently cut interest rates in each of its last three meetings in 2019. As a result, many experts expect mortgage rates to dip below averages witnessed in the previous two calendar years, propelling demand and increasing affordability for specific buyers who may have previously been on the fence. At the regional and local levels, shrinking inventory, torrid price appreciation, and bidding wars will continue near some old familiar places while new, desirable locales emerge.

As 2020 comes into focus, what’s in store for the U.S. real estate market?

Let’s point the viewfinder at three key variables:

Mortgage Rates

Rising rates can weaken housing demand, but that won’t seem to be the case for 2020, according to industry experts. Sam Khater, chief economist at Freddie Mac, sees the 30-year fixed-rate mortgage rate dipping a bit in 2020. The average rate in the coming year may land around 3.8 percent, which marks a slight decrease from the four percent figure observed in 2019. With rates remaining in this range, home sales are forecasted to climb from 6 million in 2019 to 6.1 million in 2020.

Low-interest rates will undoubtedly help prospective homeowners find housing that suits their needs, but on the other side of the equation, at least one obstacle still sits in the way of affordability. Inventory will continue to tighten throughout 2020, making the home search a bit more competitive at the lower end of the price continuum. If there’s any silver lining, home builders will help alleviate demand for single-family dwellings, despite a dearth of labor and buildable land.

Once thought to shy away from the goal of homeownership, folks ranging in age from approximately 23 to 38 accounted for 46 percent of mortgage originations in September 2019— a three percent bump up from the prior year. Can that pace continue? 

Wedged between tame interest rates and shrinking supply, Millennials looking for starter homes may experience some challenges. On the one hand, the low cost of money opens up a broader selection of properties from a price perspective. Still, on the downside, competition among buyers in this demographic— and price range— will yield a scarcity of suitable choices. Nonetheless, Millennials could likely grab more than half of all mortgages originated in 2020.

Price Points 

Dwindling supply will undoubtedly benefit parties on the sellers’ side of the transaction. Not only have median home values rebounded from historic lows in the wake of the 2009 financial crisis, but the expectations are that growth will carry on through 2020. Khater predicts that nationwide home prices will rise an average of 2.8 percent in 2020, a decrease from the 3.3 percent level expected when final 2019 statistics materialize. As price appreciation presses on and fewer new listings come to market, sellers gain the upper hand.

A contributing factor to inventory issues is that homeowners have stayed in their properties longer than a decade ago. In 2010, homeowners spent an average of eight years in their dwellings, a figure that has increased to 13 years through the end of 2019, according to statistics from Redfin. In further research conducted by Freddie Mac, the enterprise found that unlike previous generations, approximately 1.6 million more seniors between the ages of 67 and 85 are staying put. That reluctance to sell delays the ownership dreams of younger buyers who must have the resources to act quickly when opportunity knocks.

Not all industry experts agree with Freddie Mac’s analysts. George Ratiu, a senior economist at realtor.com, forecasts the average median home price to increase by less than one percent. A six percent increase in single-family housing will help relieve some of the inventory pressures but not enough to meet the needs of all buyers. Millennials will continue to search for affordable housing in under-the-radar markets rather than opt for the amenity-rich urban lifestyles that now rest beyond their means.

Market Dynamics

If the question becomes where opportunities exist in the 2020 real estate market, the answer will depend on which side of the transaction a participant sits. First-time home buyers, priced out of white-hot metro markets, will look to find housing in affordable locales. In the Northeast, for example, the journey may lead to Allentown, Pennsylvania. Nearly equidistant from New York City and Philadelphia, the city boasts the highest percentage of homes available at the region’s median income level, according to realtor.com. 

Baby boomers not yet ready or willing to pull up stakes have enjoyed tremendous growth in places like Oxnard, California, a seaside SoCal hamlet where the median listing price exceeds $780,000. Annual price appreciation in the past year came in around five percent through October 2019, and proximity to the burgeoning tech scene in Los Angeles will only keep the momentum going. 

Investors who subscribed to the buy low, sell high mantra will find intriguing multifamily possibilities in Boston, where new construction, population growth, and employment opportunity clear a path to growth. Smaller metropolitan markets such as Colorado Springs run less of an overbuilding risk and have experienced at least four percent rent growth, according to CBRE. 

Final Thoughts 

For those individuals and entities with a vested interest in the 2020 U.S. real estate market, it will be prudent to keep eyes on forces destined to spur decisions: where to buy, when to buy or sell, and how long to hold. Monitoring global economic trends and acquiring in-depth knowledge of local markets will help participants navigate seas of relative uncertainty. After all, predictions are just that: predictions. Careful analysis, evaluation, and action (or inaction) hold the key to successfully reaching your real estate goals, from peaks to troughs— and everywhere in between.