When 2018 began, real estate investors were looking forward to a prosperous year. And, in the beginning, they weren’t wrong: overall, the outlook was good, and several cities, such as Washington, DC, showed promise for significant growth. But as the market began to lose steam, they wondered what that would mean for 2019. What sort of trends should they be monitoring, and what can they expect? With 2019 upon us, let’s take a look at what investors should expect, and what they should be on the lookout for.
Rising Mortgage Rates
Mortgage rates have been rising steadily for the past two years, though they’ve managed to stay below what one would normally expect to coincide with our nation’s strong economic growth. Expect that to change in 2019, when the 30-year, fixed rate mortgage once again makes its way to 5.8 percent — a level we haven’t seen since the housing crisis of 2008. Rising rates aren’t going to bring things to a standstill, but they will certainly force investors to reevaluate their strategies depending upon their market in which they’re investing. Expect to see experienced fix-and-flip investors turning to fix-and-rent models.
Expect a Deceleration in Growth
While housing growth is still positive on average, it’s clear that the markets are slowing down. If you look at the housing markets that lead the charge in our recent growth cycle, many of them are experiencing a rather rapid deceleration. And of the 25 housing markets that are demonstrating the most dramatic deceleration, 10 of them are in Florida alone. Others rounding out that list include once unstoppable markets such as San Francisco, San Jose, Portland and Denver.
This is not to say all markets are heading downward, but investors will have to pay closer attention to their target markets than they’ve had to in recent years. There are a small number of markets that continue to accelerate while mid-range markets will most likely show fairly stable markets.
REITs Set to Underperform
According to the Wells Fargo Investment Institute, Real estate investment trusts (REITs) are likely to underperform in 2019, when compared to other real assets. These REITs have been outperforming for the past few years, but the aging economic cycle and the increase in long-term rates are primed to slow performance.
The 2019 Outlook published by Wells Fargo Investment Institute tells us, “Some REIT fundamentals are begging to show the signs of a maturing economic cycle such as slowing net operating income growth, peaking occupancy rates, declining demand for commercial real estate loans, and increasing sensitivity of REIT prices to higher interest rates.”
Millennials Will Still Buy Homes
Rising mortgage rates are not going to be enough to stop the incoming class of Millennials who are turning 29 next year — the peak age for household formation and home buying. While a lot of prospective homebuyers will be deterred by the expected rate hikes, Millennials will make up the largest segment of buyers in 2019.
And not only will Millennials dominate in first-time home purchases, there’s also the older Millennials to consider. With fewer Boomers and Gen Xers making purchases, the older Millennial segment will have a lot of option in the mid- to upper-tier price point. Plus, it is estimated that the majority of 2019 closing will feature this older subset of the Millennial generation.
Look Toward the Suburbs
Millennials are heading to the suburbs. While investors have enjoyed the success of the recent urban revitalization in smaller U.S. cities, young adults have found themselves eyeing the areas outside of those cities, especially if they are walkable or have a solid transit system in place. According the Census Bureau, more than 2.6 million people are annually moving from principal cities in metropolitan areas between 2016 and 2017. Plus, the data in the ULI’s Top 20 emerging market report shows that, over the past five years, 55 percent of new residents have relocated themselves to a home in the suburbs.
More Inventory (but Not Much More)
Inventory will remain somewhat tight, but you shouldn’t expect to see multiple offers and bidding wars with the same frequency that has been enjoyed throughout the past few years. It’s clear that the number of homes built or going on the market is going to increase slightly; at the same time, the speed of home sales is slowing slightly. This combination of facts is putting more homes on the market, but not so much it feels saturated. Buyers shouldn’t expect the situation to get worse, though it’s also not going to quickly improve.
Renting over Flipping
Let’s face it, flipping is not as easy to do as TV makes it out to be. And now, with younger people renting far longer than they used to, it makes sense to look into renting out properties, rather than trying to flip them. The opportunity for a windfall profit disappears, but it does allow you to enjoy long-term, dependable income when the property is ideal for a rental market.
Technology in Real Estate
Real estate is a big part of the U.S. gross domestic product, so it should come as no surprise that tech firms, services and startups are looking at new, innovative ways to integrate their abilities into the market. In fact, it is projected that tech investments in real estate may exceed $5.2 billion by the end of 2018. And you can see it already, with a variety of new platforms, such a Bungalo, Knock and Ribbon, are being introduced on a routine basis.
Slower, but Not Worse
So, yes, we can expect things to slow down in 2019, but that’s not necessarily a bad thing. When taking the long view, one can see how slower price appreciation gives people’s incomes a chance to rise again. As sales decelerate, inventory can once again normalize. Nobody likes the term “slowdown,” but, in truth, it can help create a healthier housing market.