Realtors are typically an optimistic bunch so I was surprised at the recent forecast out of the National Association of Realtors (NAR) predicting a 2% decline in closings next year.  Mortgage rates are at historic lows and should remain low through 2020 and wage growth is strong which should lead to a strong real estate market.  Why is NAR predicting a decline in 2020 sales?

What was in the data from the National Association of Realtors?

According to realtor.com U.S. home sales probably will fall next year as Baby Boomers gridlock the housing market by aging in place.  Are seniors really the largest driver of the decline in sales? 

What is the real reason for the decline next year?

Basic economics tells us that supply and demand are the drivers of prices and completed transactions.  I think pinning the blame of the housing slowdown on “seniors aging in place” is a bit far-fetched.  What is causing the declines in sales is driven by basic economic theories.

1. Supply: Supply is limited at lower price points for two reasons.  First building has become more expensive due to increases in labor and material costs.  With higher costs it is difficult to build less expensive properties as the margins in many cases is too tight.  Second governmental policies are drastically increasing the cost of building.  As building codes continue to become more stringent the cost to build is substantially higher. For example, In the new building codes, there are increased requirements for the “tightness” of a house.  In order to meet the new requirements upgraded windows, doors, insulation, house wrap, etc.. cost more.  Furthermore, once a house is tighter, new ventilation systems are required to allow the air to remain healthy.  Don’t get me wrong, efficiency is critical, but these policies have resulted in a substantial increase in costs crimping the supply of houses at the lower price points
2. Demand: We saw in 2019, consumers sitting on the sidelines in regards to housing.  The job market is the strongest since the 1960s, mortgage rates are at historic lows, and inflation has been nonexistent.  All of these factors should lead to one of the strongest housing markets since the last crisis, yet most markets throughout the country were flat for 2019.  The consumer is telling us with their wallets that they are “worried” as they are not willing to commit to large purchases even with all the great economic news coming out. This trend will continue and might accelerate in 2020

Summary

The real drivers of the predicted decline in 2020 should not be pinned on Boomers aging in place.  There is considerably more going on in the market with housing become more expensive than the market can bear and consumer confidence beginning to wane. I would agree with NAR that housing sales will likely be flat to a very small decline with prices staying about flat as well.  The true drivers of 2020 will be constrained supply due to costs and a tepid consumer.

Resources/ Additional Reading

1. https://www.housingwire.com/articles/boomers-likely-to-gridlock-the-housing-market-in-2020/
2. https://www.realtor.com/research/2020-national-housing-forecast/

I need your help!

Don’t worry, I’m not asking you to wire money to your long-lost cousin that is going to give you a million dollars if you just send them your bank account!  I do need your help though, please like and share our articles on linkedin, twitter, facebook, and other social media.  I would greatly appreciate it.

Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, BusinessWeek,  the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all they need is their simple one page application (no upfront fees or other games).