December 27th, 2019 7:14 AM by Jackie A. Graves, President
2020 will be a challenging year for the housing market.
On the one side, there's a strong US economy that has driven the
unemployment rate to record low levels, boosting disposable income,
which makes a bullish case.
Then, there are low mortgage rates and housing shortages, which
add to the bullish sentiment.
"We think the housing market will remain strong for the
most part in 2020, as low-interest rates will keep demand high for new
mortgages," says Josh Stech, CEO, and Co-Founder of Sundae, a site that
helps sellers get a fair price for their house. "We also think there will
continue to be shortages of new housing in many markets, which will contribute
to overall price growth."
On the other side, there's the problem of affordability, which
will put the brakes on the housing market. The Case Shiller Home
Price Index in the US reached an all-time high of 218.27 Index Points in
September of 2019, making it difficult for first-time home-buyers to afford a
"While sellers may be able to ask more for their homes,
they're likely to get fewer offers in total due to more buyers being priced out
of the market," says Stech. "This could lead to longer listing times
and increased stress on sellers who go the traditional route of marketing their
homes on the MLS."
That's how bull housing markets usually end.
And there's "pent-down" demand, which has been
"stealing" sales from the future since the era of "free
money" began. A period of very low interest rates, that is.
To understand how "pent down demand" (a concept I
coined) affects sales for high ticket items, a good place to begin is with the
more familiar concept of "pent up demand," the lack of current
demand for high-ticket items households buy — like appliances, autos, and
Pent up demand usually arises ahead of periods of consumer
euphoria. It's caused by such factors as lower price expectations, depressed
consumer confidence, or a credit crunch.
And it disappears together with these conditions when that
future day comes, and consumers rush to buy the items they put off in the past.
In contrast, pent down demand arises after a period of consumer
euphoria. It's caused by the low cost of financing — which blurs the
distinction between present and future. Why wait to buy a new car or a new home
next year when you can have it this year, with a "zero percent"
Simply put, pent down demand "steals" sales for high
discretionary items from the future. It eventually depresses spending on these
items when the future arrives.
That's what happened in the middle of the last decade when the
housing market went from a boom in 2005 to a bust in 2007.
Does it mean that the US housing market is where it
was back in 2005? Dan North, chief economist at Euler Hermes North
America, doesn't think so. He sees several differences between then and now.
"Houses, in general, are probably overvalued but not to a
great degree, and certainly not as much as before the housing bubble peaked in
2005," North says. "The housing bubble which had been inflating for
over a decade before it collapsed had been driven by significant risks such as
speculation, house-flipping, and highly questionable mortgages such as
no-documentation loans, and adjustable-rate loans which turned disastrous for
That's why he assigns low probability of a housing crash in
2020. "At the current time we see little of these excessive risks, and
combined with only modest overvaluation, the probability of damaging housing
crash is limited."
Queen, New York-based independent real estate agent Basili
Makris agrees. "I expect real estate prices to stabilize in 2020," he
says. Though, some local markets may have a little bit more room to rise.
Still, there's "mean-inversion," which can raise the
probability of a market correction after years of a big run.
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