Next year will be hard on the housing market, especially in these big cities

Home sales will drop, the housing shortage could become the worst in U.S. history, and home values will shrink in some cities. That’s the 2020 forecast from realtor.com, which holds one of the largest databases of housing statistics available.

Sales of existing homes will fall 1.8% from 2019, according to the forecast. Home prices will flatten nationally, increasing just 0.8% annually, but prices will fall in a quarter of the 100 largest metropolitan markets, including Chicago, Dallas, Las Vegas, Miami, St. Louis, Detroit and San Francisco.

It is a seemingly contrary assessment, given the current strength of the economy and of homebuyer demand, but the dynamics of this housing market are unlike any other — the result of a housing crash unlike any other.

“Real estate fundamentals remain entangled in a lattice of continuing demand, tight supply and disciplined financial underwriting,” said George Ratiu, senior economist at realtor.com. “Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can’t find.”

CHICAGO, IL – APRIL 5: The Chicago Skyline is shown above this south side neighborhood in Chicago, Illinois.

Ricki Carioti | The Washington Post | Getty Images

It’s all about supply. The inventory of homes for sale has been falling steadily for several years and is at its lowest on the lowest end of the market. That caused prices to overheat, weakening affordability. The 2020 forecast offers no relief, in fact just the opposite. As demand heats up in the spring, driven by the growing number of millennials entering the market, the supply of homes for sale could hit its lowest in history. The situation will only be exacerbated by the baby boom generation, which, according to the forecast, will have little incentive to sell, given weaker home prices.

“While millennials share many similar traits with prior generations, they have been marked by a delay in major life milestones, including starting a family and purchasing a home,” said Ratiu. “Millennials not only purchased a higher-priced first home but faced with growing families, many of them skipped the traditional starter home and moved straight to a mid-priced, trade-up home.”

That dynamic will continue in 2020 and added pressure on the middle range of the market. Millennials will dominate the housing market, accounting for 50% of all mortgages by spring, according to the forecast. Just short of 5 million millennials will turn 30, which is when many people buy their first home, and the oldest will turn 39, generally when family dynamics kick in and people move to larger homes in the suburbs.

Single-family construction will increase in 2020, up 6% annually, according to the forecast, but that will not alleviate the supply crunch. Part of that is due to the very slow recovery of the nation’s homebuilders, who began rebuilding their businesses after the historic housing crash mostly in the move-up and luxury markets.

On the bright side, builders are well-positioned to increase profits thanks to the shortage of existing homes for sale.

“We believe homebuilders are poised to enter 2020 with some of the strongest supply/demand fundamentals we’ve seen in the 10-year housing recovery to date,” Raymond James housing analyst Buck Horne wrote in an October note to investors. “Homebuyers responded convincingly to lower mortgage rates this summer, leading to a re-acceleration of home price appreciation across most markets.”

Sellers, however, have yet to meet the incremental demand with additional new supply in most markets, Horne noted.

More homeowners are staying longer, according to real estate brokerage Redfin, which analyzed Census data. The typical American homeowner has spent 13 years in their home, up from eight years in 2010, as more households are choosing to age in place.

Downtown backgrounds houses in the North West residential neghbourhood in Las Vegas, Nevada

Joe Klamar | AFP | Getty Images

The supply of entry-level homes is also well below historical levels because during the foreclosure crisis, investors bought millions of distressed properties and turned them into rentals. The bulk of these properties were on the lower end of the price spectrum. The expectation was that as home prices recovered, investors would sell the homes, pocket the profits and return the housing supply to its previous level. That did not happen. The single-family rental market was so strong that investors held the homes, built large-scale, multicity service and maintenance platforms and created a new asset class for even bigger investors to fuel.

“The supply of rental properties has risen in tandem with demand, while new residential construction has lagged, placing the rental market in a good position to offer alternatives for buyers priced out of their markets,” said Ratiu. “However, the affordability challenge will continue to cast a shadow over housing in 2020, as both home prices and rents remain elevated.”

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