Once Hot Housing Market Likely to Cool Further in 2019
Rising mortgage rates are just the latest blow
A long rally in the housing market stumbled in 2018 and looks poised to slow further, another headwind for a U.S. economic expansion already contending with choppy financial markets and global trade tensions.
The recent decline in home sales reflects a lack of inventory and the rising cost of homes, which has priced many buyers out of the more desirable markets. Home prices are now at all-time highs and inventory levels in recent months have begun climbing back from their lowest level in three decades. Rising mortgage rates, which nearly touched 5% late this year as they climbed to their highest level in more than seven years, are the latest blow.
“Suddenly the light turned off in the second half of the year, with sales tumbling down and inventory rising,” said Lawrence Yun, chief economist at the National Association of Realtors.
Other developments that weighed on the market are likely to persist, or even worsen, economists said. A record drop in foreign purchases hurt markets in Florida, California, Seattle and New York. Those buyers, who have been put off by higher prices and increasing global tensions, show little sign of coming back.
The tax bill that passed in late December 2017 could also weigh on some of the same once-hot markets. The bill capped the deduction for state and local taxes at $10,000. Most homeowners won’t fully realize the impact the bill had on their bottom line until they do their taxes in April, which could provide another negative jolt to pricey markets that are already slowing significantly.
In 2018, the housing market slowed despite a strengthening economy, unemployment falling to near a 50-year low, and a stock market that until recently hovered near all-time highs. That divergence between housing and economic performance has persisted for much of this year, defying predictions that healthy economic growth would pull housing out of its slump.
Now, some economists worry about the opposite: That weakening home sales could become a bit of a drag on economic growth next year as other sectors of the economy also begin to weaken. Escalating trade tensions with China, rising interest rates and a December stock market rout have put the expansion on shakier footing.
“In 2019, the economy will most likely grow, but a cooler housing market will contribute less to the overall economy,” real-estate broker Redfin wrote in a December report.
Housing contributes about 15% to 18% of gross domestic product. Existing-home sales help drive other sectors of the economy. Consumer confidence and home-improvement spending, construction and mortgage lending tend to suffer when home sales slump.
Robert Dietz, chief economist at the National Association of Home Builders, said he expects single-family housing starts to grow less than 2%, down from about 4% this year and 8% in 2017.
The housing market is “telling a story that the economy is slowing down," Mr. Dietz said.
Still, many economists say the housing market is likely to continue to ease gradually, rather than fall hard as it did a decade ago. Existing home sales posted their largest annual decline in seven years in November but climbed 1.9% compared with a month earlier. That suggests the market is stabilizing, albeit at a lower level than its heyday in 2017.
“My best guess is the housing market really comes into a soft landing. That’s the best-case scenario,” said Ralph McLaughlin, deputy chief economist at CoreLogic Inc.
But, Mr. McLaughlin cautioned, that best-case scenario depends on whether buyers and sellers start to panic as the market continues to slow, especially given how fresh the memories of the 2008 crash are.
“Markets often follow animal spirits or psychology,” he said. “Sometimes a soft landing is perceived as a crash.”
The more optimistic read is that if home-price growth slows, inventory continues to swell and mortgage rates stabilize that could give the housing market a brief second wind, as buyers rush back in before rates rise further.
Mr. Yun said strong underlying demand, especially from millennials who were unable to buy homes when the market was frenzied, will help keep the market relatively flat next year. He expects home sales to decline 0.4%. He said home-price appreciation will likely slow to about 2.5%, down from about 5% this year.
“We think 2017 will be the peak of this cycle” for home-price increases, said Doug Duncan, chief economist at Fannie Mae .
The path for mortgage rates next year remains uncertain. Most economists expected them to top out at around 4.5% this year, but when they shot past that mark and close to 5% it had a larger-than-expected effect on the housing market. Economists now expect rates to end 2019 around 5.5%. The Federal Reserve raised short-term interest rates again on Wednesday, though it indicated it could slow the pace of rate increases next year, citing economic headwinds. That helped push the yield on the benchmark 10-year U.S. Treasury to 2.782%, down from about 2.830% before the Fed’s announcement, its lowest level since May. It has since rebounded slightly.
But if rates continue climbing, that is likely to further chill housing demand, unless wage growth accelerates significantly. Mortgage lenders are reporting the lowest purchase mortgage demand expectations in the five-year history of Fannie Mae’s survey of mortgage lender sentiment, a signal of bumpy times ahead for the mortgage industry.
Write to Laura Kusisto at laura.kusisto@wsj.com