Forecast: Home-For-Sale Inventory to Shrink, Prices to Fall in 2020

The U.S. housing market will continue to slow in 2020 as inventory dives toward historic lows and economic uncertainty prompts consumers to pull back on spending, according to the realtor.com 2020 housing forecast released Wednesday.

The forecast predicts that despite some relief from new construction, moderating home prices and relatively low interest rates, first-time buyers will continue to struggle with affordability. Sellers will contend with flattening price growth and slowing activity. These trends will drive existing home sales down 1.8% to 5.23 million.

Highlights of the realtor.com 2020 forecast include:

• Home prices will flatten, increasing just 0.8% nationwide. Prices will decline in more than 25% of the 100 largest metros, including Chicago, Dallas, Las Vegas, Miami and San Francisco.
• Inventory shortages will prevail and could reach historic lows, especially the entry-level category.
• Mortgage rates will remain reasonable, averaging 3.85% throughout the year.
• Affordability will remain a key driver for buyers, benefiting mid-sized markets.
• Millennials – with the oldest members approaching 40 and the biggest cohort turning 30 in 2020 – will surpass 50% of all home purchase mortgages.
• With little incentive to sell, baby boomers will continue to hold onto their homes, while Gen X is more likely to upsize, freeing up some entry level inventory.

“Housing remains a solid foundation for the U.S. economy going into 2020,” said George Ratiu, senior economist at realtor.com. “Although economic output is expected to soften – influenced by clouds of uncertainty in the global outlook, business investment and trade – real estate fundamentals remain entangled in a lattice of continuing demand, tight supply and disciplined financial underwriting. Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford, but rather what they can find.”

Forecasted key 2020 housing trends:

• Millennials expand their domination of the market – Demand from those born between 1981-1997 will reach new highs in 2020 with millennials accounting for more than 50 percent of all mortgages by the spring. Several factors are at play here. In 2020, the largest cohort of millennials – 4.8 million of them – will turn 30, a time when many purchase their first home, while the oldest members of the generation will reach 39, often a point when many look to move from the city to the suburbs for family-friendly amenities. The largest generation in history will consolidate their top spot in mortgage originations and effectively outnumber Gen X and baby boomers combined in their share of purchases.

• Growing economic uncertainty – Although a recession isn’t likely in 2020, the economy will show signs of softening. The pullback in business spending is expected to lead to a slowdown in consumer spending. Housing remains the largest single consumer expense, making home-buying activity a major contributor to the U.S. economy and a bellwether for economic expectations. Rising uncertainty about the economic outlook will dampen consumer enthusiasm about spending, leading to a decline in sales and an increase in homeowners’ tenure.

• Low inventory – Despite increases in new construction, next year will once again fail to bring a solution to the inventory shortage that has plagued the housing market since 2015. Inventory could reach a historic low as a steady flow of demand, especially for entry level homes, and declining seller sentiment combine to keep a lid on sales transactions. With housing prices expected to stabilize and concern over economic uncertainty, there will be little incentive for baby boomers to sell in the coming year. The younger Gen X is more likely to upsize and free up entry level homes, but not fast enough to ease inventory woes.

• Affordability brings secondary markets to the center stage – As buyers are priced out of suburban environments near large metropolitan areas, they will begin searching for family-friendly lifestyles in other metros or across state lines. Cities in Arizona, Nevada and Texas will continue to benefit from shoppers looking for more affordable alternatives to California. Meanwhile, home seekers from expensive Northeast markets will find the warmer options in the Carolinas, Georgia and Florida attractive. Midwest markets will become more attractive, as buyers will find the affordable housing and solid, diversified economies of Ohio, Indiana and Kansas compelling.

• Election will be 2020 wild card – Along with the presidential election, there will be candidates running for 35 of the 100 seats in the U.S. Senate, along with 435 seats in the House of Representatives. The 2020 elections will be closely watched by consumers and businesses for indications of potential changes. Although the outcome of the presidential election is not directly tied to the performance of the housing market, business optimism and investments, along with consumer confidence and spending do influence economic output, and can also influence housing activity. Looking at housing trends over the past three decades, the pace of sales, price and inventory are intertwined with economic performance – employment, wages, and interest rates.

Sale and Price Forecast for 100 Largest Markets