What’s the real estate market going to do in 2020? Let’s talk about some of the bigger emerging trends. Scroll quickly or digest slowly. Anything to add?
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TRENDS TO WATCH IN 2020:
Affordability: Buyers are struggling to afford higher prices. Despite positive economic news lately the truth is home price growth has outpaced wage growth and rents have also risen substantially. This means many buyers and renters are having a difficult time with higher prices.
Blue is the color of the year: This year the Pantone color of the year is Classic Blue. Does this mean we’ll see more blue? Maybe. Maybe not. In recent years we’ve already been seeing blue in kitchens especially. No matter what, when looking through home magazines there are many vibrant colors instead of just gray and white.
Sliding sales volume: A byproduct of shrinking affordability is a smaller pool of buyers able to handle higher home prices. This is something to watch and even more important than prices in my opinion. Often we fixate on what prices are doing, but the number of sales happening is the best indicator of the temperature of the market. Are buyers putting their foot on the gas or brakes? Show me the number of sales and I’ll let you know.
Addicted to low rates: We’ve had eight years of historically low rates and we’re now feeling the effects. Prices have risen dramatically, people are staying in their homes longer, and the market feels hyper-sensitive to rate changes. Thus what happens with mortgage rates this year will play a huge role in how the market feels and unfolds. Check out this mortgage rate table from Len Kiefer below (or here). Can you see why 2018 felt so dull? I know it seems crazy that buyers would freak over rates just above 4.5%, but that’s where we’re at (and climbing rates lessens affordability).
Ending single family zoning: There’s a movement to do away with single family zoning in order to help create more housing. In 2019 we saw Minneapolis do this by allowing up to three units to be built on a single family lot, and this is definitely something to watch in many markets across the country. By the way, if you own land, could it become more valuable if zoning changed?
Tech company invasion: It almost feels like there’s a tech bubble because so many companies are trying to get a piece of the real estate pie. On one hand some start-ups are going to fail because their algorithms are designed for labs rather than a relationship-centric real estate market. On the other hand some tech companies are poised to gain market share this year. In Sacramento Opendoor looks to have sold about 1% of transactions last year and they currently own 90 homes. I’m guessing Zillow is aiming for 1-2% of market share this year. Will they be successful? I’ll let you know next year… In all of this it’s good to remember the traditional model represents the vast bulk of the housing market despite the massive attention these companies are getting. Yet we can’t ignore this trend because it’s bound to spur the traditional model to become more efficient.
Overpricing will still be an issue: Price growth has clearly slowed, but sellers still think it’s super hot. This is a glaring issue because sellers tend to think they’re going to get ten offers at any price they choose from very desperate buyers longing for their home. It’s like sellers have shown up at the end of a movie and they have no idea what the movie is about (but they think they do). My advice? Price for the dynamics of the current market rather than a hot market from yesteryear.
Buyers grow even pickier: In 2019 there was a greater sense of hesitancy about the market. Lots of buyers felt leery. Am I buying at the top? Am I going to get stuck if the market changes? What does the future hold? These questions aren’t easy to answer of course until the future actually happens (sorry, but it’s true). The reality is uncertainty is bound to cause buyers to become even more discerning about condition, location, paying the right price and waiting for the right house.
Staying put instead of moving: We have a market of homebodies where nobody is moving. Okay, that’s an overstatement. It was reported recently that homeowners are staying put an average of thirteen years compared to just eight years a decade ago. There’s simply less incentive to sell in light of low mortgage rates and higher prices. Why move if you’re sitting pretty? This of course is one reason why we’re not seeing as many listings.
Checking out of California: Despite some residents staying put, this year there will be lots of Californians moving to all the usual places like Texas, Nevada, Arizona, Oregon, Idaho, etc… For the real estate community, I highly suggest you consider who has incentive to move this year. Remember, a California pension goes a long way in a lower-priced state. Check out a deep piece by CalMatters and you can dig around the U.S. Census Bureau site all day to try to find some data that might be insightful for your business. On a related note, let’s keep an eye on areas plagued with rising fire insurance too as that can unfortunately force migration.
More 1031 Exchanges: We’ll likely see more 1031 Exchanges this year as investors move their money. In my experience there are more in an up market than a down market, and we’re still going up, so be ready. I’ve seen quite a few Bay Area investors park their money in Sacramento, and I’ve seen some Sacramento investors move their money to lower-priced areas. That’s the dream, right? Cash out when prices are higher and buy something better elsewhere.
Consolidation in real estate: Having lower sales volume can be painful for both mortgage companies and real estate offices. Thus we’re likely to see some banks continue to lay people off, mortgage companies will join forces, and some real estate brands and brokerages will need to get creative about staying afloat and trimming the fat with less purchases flowing.
Election year hype: “It’s an election year, so it’s going to be a strong year.” That’s the sentiment we often hear in the real estate community, but an election year isn’t the silver bullet to alter the bigger trend the market is already experiencing. I have a deep blog post coming soon about this.
Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.
The narrative of Boomers & Millennials: Be on the lookout for Boomers who need to downsize and Millennials trying to get into the market. We’re bound to see lots of generational conversation this year as Boomers age and Millennials “come to age” so to speak to get into the market. One looming issue that’s been getting more press lately is there is an enormous Boomer population whereas GenX was a smaller generation. Thus at some point it makes us wonder who is going to buy the homes of aging Boomers in years to come. This is something to watch more thoroughly over the next decade. And to make a safe prediction, we’re definitely going to keep seeing “Okay, Boomer” references in articles.
Well, that’s what’s on my mind. I could go on and on, especially about things like fire insurance woes, PG&E, Prop 13 reform, rent control, cannabis laws, etc… But at some point I have to stop.
By the way, click to see 2019 market recap images for a few local counties.
I hope this was helpful or interesting.
Questions: What else do you think will be important in 2020? Did I miss something? I’d love to hear your take.
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So many great insights as usual Ryan. I love the mortgage rate chart.
Thank you so much Gary. Yes, I love that chart. It’s such a great way to visualize rates and even how the market has felt through the years.
My twist on the demographic numbers is more a fixed spread than a linear or progressive generational flip. The eldest boomer, born in 1945, is 75. The youngest boomers were born in 1965 and are 55 and the remaining in the middle. The eldest Millennial, born in 1982, is 38 (Old in context). I’m a middle boomer and built my home in 2000 to age in place and not going anywhere (except to exit.) Compare those numbers to the Milli Vanilli’s and lack of mobility of today, and you have a stalemate. Then factor medical advances (DNA engineering reducing age-related issues) Driverless cars and air taxis, and more unknowns will keep many pundits guessing into the future
Thank you Tom. I love it. Your comment underscores that nobody really knows what will happen exactly. I will say lots of Boomers are at an age where they’re retiring though and looking to downsize or move elsewhere. Thus I do expect some natural migration from this demographic purely because of age and lifestyle. I was just listening to a podcast today about aging and medical advances. It’s fascinating to consider the problem of having enough money if people stay alive longer. Ha.
Great stuff Ryan. The migration patterns are interesting as are the zoning changes. Los Angeles has adopted some higher density zoning changes in areas near transit (rail and bus lines). Values in these zones are rising as developers see an opportunity to build more housing units on lots in these new zones
Thank you Mark. Well said. I just read a piece about accessory dwellings in Los Angeles and San Francisco. The rise in permits has been astounding. I mention this because when the rules change or zoning is amended, it can end up making a big difference.
By the way, I totally forgot to mention solar in my post today. To be fair I made sure this wasn’t a hyper-California / Sacramento post, but it is definitely a big change for solar being mandated for new construction. Obviously your emphasis on solar reminded me of this.
So much great content and insight, thanks Ryan. I too have been looking at the Baby Boomer generation and thinking how they are going to impact housing, health care and other aspects of our economy just because there is such a large number in their generation. Thankfully there is more new construction that is being built for multi-generation type families but I’m not sure if it’s going to be enough. Maybe we will start seeing a premium for larger bedroom counts going forward, who knows? Thanks!
Thanks Gary. That’s a great question and definitely something we need to watch. This year there are new casita laws taking effect in California and over the past few years the rules for building accessory dwelling units have been relaxed. This can come in handy for housing aging parents. We may need that much more in the future.
Another informative blog, you pack good info into a short read, and I like it. I like the year in review graph, I printed and posted it on my wall, thanks, and the SF Zoning thing worries me, is all of California next??? OK, I am off to go fine those 1031 Exchange buyers and sellers, lol
Thank you,
Thanks Justin. I appreciate it. Yes, there is lots of noise online about changing zoning. And yes, there is conversation about this in California too…. https://www.latimes.com/california/story/2020-01-06/sb-50-changes-single-family-zoning-california
Good luck finding those buyers. Here’s a cool graph I posted on Twitter to show 1031-Exchange activity in the Sac Region for the past twenty years. This isn’t the perfection representation of the market for some data quality reasons, but there is enough here to see the trend. https://twitter.com/SacAppraiser/status/1212903334627045376
Great article and the Seller and Buyer table was spot on. I’d add that people think interest rates will stay low. But history tells us that interest rates may increase after the election.
Thank you Camelia. It’s going to be an interesting decade or so to watch how rates change in the future. There just isn’t much room to see them go lower unless we start seeing rates we’ve never seen before below 3%.
Ryan, once again great job. There’s another elephant in the room for people like us who are looking to move into the city. Yes there’s huge cons, but a lot of great reasons as well. Something that is lurking that I don’t think HOA’s are thinking about is the growth of electric vehicles. We have discarded over a dozen properties due to either a lack of storage or a mechanism to even install a charger for our electric car. Awesome condos and lofts are meaningless to us due to this problem. Where will this problem be in 10 more years?
Thanks Brock. That’s an interesting question. I think time will tell and the market will have to adapt if this is something needed. I see more and more electric charging stations, particularly at newer commercial developments. There’s almost always a few electric car parking spaces. Even my local store up the street has a charging station. It’s clearly the wave of the future for commercial development and residential building too. On a related note I’ve often thought about what will happen as driverless vehicles presumably become more prominent. What will happen to the need for a garage? Granted, most people use a garage for storage anyway instead of parking, and I doubt the need for storage is going away. But I wonder at some point if we could see home design change if we don’t need 20-30′ of space on the front of the house for storage / parking. To me this seems like a far distance in the future, but we shall see…
Great points and interesting topics as always!
We are still seeing lots of gray color in houses but the trend for blue and more vibrant colors does appear to be emerging.
I just read a report that Florida is now the #1 state Californianians are migrating with Texas #2. Also interesting, California had the most inbound moves of any state as well as the most out of state moves. This was a report from Atlas Van Lines.
Great post and Happy 2020!
Thanks Shannon. That sounds like an interesting article. I’ll have to check that out. What I find interesting and frustrating about migration stats is they can bounce around all over the place depending on the article. So while Atlas stats might show California has the most inbound moves of any state, I haven’t heard that anywhere else. So it makes me wonder if it’s a trend seen in their business or a bigger trend. Stats are stats though and I’m trying to look at all of them… Thanks again.
Here’s the article- and yes , that’s why its a good idea to read beyond the headlines and more than one source. https://www.dallasnews.com/business/real-estate/2020/01/06/not-everybody-is-leaving-california-for-texas/
Thank you so much. And please know my comment wasn’t meant to be critical. I’m just saying it’s legitimately not easy to sift through articles to find the truth. A few years ago an article said more people have left the state than come for about 15 years in a row. But then last year an article said that number was 7 years. I think I’ve even heard three years too. And now a recent piece by the LA Times shared contrary information in that the rate of growth is slowing technically instead of declining.
I think part of the problem is how the numbers are used and interpreted. I find most articles talking about migration use US Census Bureau stats too. Now I just need a week off so I can do nothing but dig into that data. 🙂
I certainly didn’t take your comment as critical. I am in agreement with you, which is why, as you point out, it is an interesting trend to watch.
Great insights Ryan! Lot’s of interesting things to watch for. I am interested to see how the changes in zoning impact your area. Here’s to a great 2020!
Thanks Jamie. This is something seeming to brew in a few markets across the country, so it’s definitely something to watch as a bigger trend. Looking forward to hearing more about your market this year on your blog. Happy New Year!!
You are awesome. That’s all 🙂
Thank you!
Thanks Jenica. You are too kind. I appreciate that. 🙂
There are definitely lots of things going on which just adds to the different layers of issues that affect value. It will be a wild ride for sure.
Thanks Tom. Yeah, the market is always moving. This is why it’s so fascinating to watch. I know I keep learning new things about the market and value every single week…
Ryan wrote: “Often we fixate on what prices are doing, but the number of sales happening is the best indicator of the temperature of the market. Are buyers putting their foot on the gas or brakes? Show me the number of sales and I’ll let you know.”
One of the metrics I watch is the absorption rate. If inventory were rising at the same time, then I would agree with you that buyers are putting on the brakes. But inventory is running lean in spite of the lower number of sales.
The number of expired and canceled listings hasn’t increased. So, it’s not that listings just aren’t selling and being pulled from the market. The trend in my estimation seems to be not that fewer buyers are buying, but that fewer owners are selling.
Looking at the number of new listings each month for 2019 in Sacramento County, you have to go back to 2012 to find a lower quantity for Jun, Jul, Aug, Sep, and Oct. For the months of Feb, Mar, Nov and Dec, you have to go back earlier than 2004 (which is where my data begins). That’s a 12% overall drop in new listings for 2019 vs 2018 in Sacramento County. In fact, 2019 is the lowest annual total of new listings in the 16 years of data that I have (I pulled the numbers from TrendGraphix).
Are some owners moving and converting their home to rental due to the high rent prices, thereby kicking the eventual sale down the road? Is the availability of telecommuting allowing more employees to stay put instead of relocating? What number of sales are new homes or FSBO (off-MLS) that we aren’t seeing in our data? Are there more multi-generational families living together longer eliminating/postponing the need to downsize? Are more seniors choosing to age in place? With low interest rates, have more owners refinanced and are simply content to stay put?
Since you can’t buy what isn’t for sale, I don’t think you can simply blame a lack of buyers for the slower volume we’re experiencing right now.
What are your thoughts?
Hi Keith. I appreciate your commentary and insight and I think you are on the pulse of the market.
We are for sure seeing less listings. I started to really notice this issue this past year in particular when pulling listing data each month. I think Trendgraphix does a great job showing this too.
It’s hard to say exactly what the culprit is and frankly over the next couple years everyone will be an expert at explaining it. When we are going through a change it’s simply more difficult to interpret, and I’m always humble about that.
An obvious issue here is people are staying in their homes longer. We know this from research that has been widely publicized in recent months and it makes logical sense also as there’s less incentive to sell. I’ve been saying that for years and I think we’re on the same page about that. Why sell when you’re sitting on a low mortgage rate, huge equity, and trading up is very costly?
Ultimately it seems this unfolding dynamic is in part an unintended consequence of historically low mortgage rates. In other words, low rates are really great for buyers, but they’re seeming to keep people in their homes through the years.
In all of this let’s remember volume really began to take a definitive turn in mid-2018 when the market got dull. So I’m thinking the bigger issue here is affordability and buyer hesitancy. When I look at graphs I make and even Trendgraphix, it’s apparent the volume skid began when rates shot up about 1.5 years ago.
Yet part of me wonders if the market is still a bit shocked from what happened in 2018. Are prospective sellers holding on more tightly now in light of how soft they saw the market get? It’s hard to say exactly. Clearly in 2019 though it seemed like this listing issue was more inflamed. But there is no mistaking the volume issue clearly started to change in 2018 as rates shot up, so I think it’s best to explain the slumping volume trend in light of that for the most part. Could it be about more or evolve because of other factors? Yes.
Inventory is sparse right now and if we persist at one month for the next 6+ months we are going to have a huge problem on our hands. But hopefully we’ll be able to see the normal rhythm of the market unfold with ample listings coming down the pipes over the next few months. Buyers are hungry for them. That’s for sure.
Long story short. We’re going to have lots of data to interpret in coming months and I think we’re going to get the opportunity to ask these questions you have asked. How much of this is about affordability and how much of it is about sellers not listing? Or is something that started as a negative reaction to rates (affordability) starting to evolve in other ways? In my mind we need time to really know more. Let’s keep watching.
Thoughts?