The U.S. housing cycle is getting a bit long in the tooth, but the next downturn is unlikely to be as severe as the previous one because housing remains undersupplied in the United States, according to Metrostudy.
In the firm’s first quarter 2019 webcast, Mark Boud, senior vice president and chief economist at Metrostudy, noted the tight housing sales market, especially at the lower end, where inventory is limited and demand is high.
“There’s a lot of pent-up demand in the lower price ranges,” said Boud. By comparison, he said, there’s too much supply for homes price above $800,000, where a glut is forming.
New home construction has been limited, as trade-driven high materials costs and adverse weather (it was a particularly wet 2018 across parts of the country) have affected the segment. Condominium and townhome construction has represented a growing share of overall for-sale units over the past couple years, rising from a low of 19 percent in second quarter 2017 to 21 percent in fourth quarter 2018.
Although Metrostudy believes the market will continue to be underbuilt through 2022, the firm’s Residential Market Opportunity/Risk Index indicates housing will be overvalued over the next five years. Overall, says Boud, Metrostudy is forecasting a mild to moderate price correction for housing in 2020 to 2021.
“Prices won’t completely cave,” said Boud. “They will go down a bit, but won’t collapse.”
Rising mortgage rates are putting downward pressure on the for-sale housing market. Metrostudy forecasts mortgage rates will top out in 2021 around 5.7 percent. And existing home sales volume has fallen 10.2 percent, year over year, as many people are choosing to stay in place instead of buying into an expensive market.
“Move-up buyers are reluctant to sell,” noted Boud. Instead, homeowners are choosing to remodel their existing homes, which are typically financed at a lower rate than what is currently available in the market. That has meant a shortage of available homes for renters looking to become buyers, pushing up prices. Still, homeownership rates have risen to the highest level since 2014, reaching 64.8 percent, according to the U.S. Census Bureau.
Trends driving the for-sale housing market have implications for home builders, and they also have implications for rental housing markets and the broader health of the economy.