Best Affordability in Years Boosting Housing in 2020

The outlook is positive for builders in 2020 with increased affordability and consumer confidence

By Kate Seabaugh

The swift decline in mortgage rates and the resulting surge in homebuying that started during the 2019 spring selling season and continues to date has been much more than we expected, giving us added support for an upward adjustment in our forecasts. Solid job and wage growth and high consumer confidence provide a nice backdrop for housing this coming year as well. The upcoming 2020 spring selling season should be solid for builders given the easy comparison to last year and sound fundamentals heading into the new year.

Looking back one year ago, housing affordability was at the worse level this cycle, which dampened builder sales. Prices had finally hit a ceiling with consumers. In 2019, builders reacted by adjusting prices and continuing to pivot to denser, smaller product to improve affordability. Given the improvement in builder conditions, we have recently upgraded our market rating for several markets, while last year at this time we were downgrading many markets across the country each month. Clearly our sentiment and the market environment has shifted and become better for builders.

The best affordability since 2017 is boosting sales.

At the end of last year, affordability was the worst it has been this housing cycle, but today housing affordability is the best it has been since late 2017. 30-year mortgage rates swiftly declined from 4.8 percent last year
to 3.7 percent today. Incomes are also rising faster than home prices for the first time since 2012, which is improving affordability. Builders have also dropped prices and become more competitive with the resale market. The new home price premium has fallen to an 18 percent premium over resales — the lowest level since 2009 — thanks to falling new home prices and an intentional homebuilder pivot to smaller, more affordable new homes. This cycle, many large builders have bolstered their balance sheets and are much more willing to adjust pricing to “meet the market” to keep sales pace. This is helping to keep affordability in check for new homebuyers.

Confident homebuyers support our more optimistic outlook for 2020.

A tight labor market and strong job growth across many top housing markets continues to boost demand for homes. Many consumer confidence indices we track are at or near an all-time high. Consumers, who are receiving better wage increases, filing record low unemployment claims, and quitting jobs for greener pastures elsewhere at record levels, are taking advantage of the return to sub-3.8 percent mortgage rates. The entry-level segment of the housing market continues to outperform other segments. Builders have made a strong pivot to this segment in recent years to take advantage of demographic tailwinds of millennials moving into prime homebuying age. Move-up homebuying activity should increase as homeowner equity is now near an all-time high.

Sunbelt housing markets continue to outperform.

Markets in the Sunbelt are generally outperforming the Midwest, Northeast, and expensive coastal markets. Phoenix is the only market we have rated as Strong in our monthly analysis of the top 50 housing mar- kets. Austin, Orlando, and Tampa are other Sunbelt markets that we view positively and feel have a longer runway than other markets. Expensive coastal markets like the Bay Area and Orange County continue to exhibit weaker sales and pricing conditions given weak affordability and very high home prices. Builders have also told us in recent survey work that these coastal California markets have potential for pricing bubbles. In 2020, we expect resale prices to increase in nearly all top housing markets. Charlotte, Salt Lake City, and Indianapolis should exhibit the strongest resale price appreciation in 2020 (+4% YOY).

While we are more optimistic on 2020, our call for an economic “hiccup” in 2021–2022 remains intact.

We are assuming modest job losses during these years, which should result in slight home sales and price declines during these years as well.

In 2020, we expect +3 percent growth in national new home sales and +4 percent in single-family permits. Single-family rental operators accounted for 2 percent of all new home sales last month, and this share will likely grow next year. Sales to this segment were nearly 0 percent two years ago and are a great reason why we are more optimistic on rising sales and construction in 2020, even in the face of a potentially slowing economy. We expect +2.0 percent national resale price appreciation and +2.5 percent new home price appreciation (net of incentives) in 2020.

Kate Seabaugh is a Manager in the Research Group at John Burns Real Estate Consulting. She may be reached at www.realestateconsulting.com.

Leave a Reply