In Housing Market Downturn, Sellers Will Have to Work Harder

Key highlights from this report:

  • Some analysts believe the U.S. is in the early stages of a housing downturn, as of spring 2019.
  • Real estate market downturns tend to happen about every 10 years, on average.
  • The next one (which could be starting now) will be mild compared to the last.

Some economists and housing analysts are predicting a downturn for the U.S. housing market. Others have stated that we are already in the early stages of such a slowdown, and that it could carry on for the next few years.

Regardless of when it begins, the next housing market downturn will likely be more mild than the crash of 2008. The “symptoms” will probably include slower home sales, inventory accumulation, and eventual home-price declines (or leveling).

Are We Entering a Housing Market Downturn in 2019?

In March 2019, the real estate information company Trulia published a report with its housing market outlook for spring 2019 and beyond. That report was written by Cheryl Young and Issi Romem, senior and chief economists for Trulia, respectively.

Among other things, the reported suggested that the United States real estate market could be entering a downturn as of spring 2019. And that’s not at all surprising, when you look at the overheated price growth of the past seven years or so. It seems that we are due for a cooling trend.

According to that report: “The [U.S.] housing market is cooling and appears to be in the early stages of a cyclical downturn, as evidenced by declining home sale volumes.”

This coincides with a report we published last month, which predicted a return to buyer’s market conditions in some cities across the country. Here’s the gist of that article: In many U.S. cities, homes are now taking longer to sell, and price cuts are more common. Housing inventory is on the rise as well. So it’s a good time to be a home buyer.

Downturns are a normal part of the housing cycle. We don’t always know when they will occur, or how long they will last. But history has shown that they are inevitable, and oftentimes necessary.

The last real estate downturn was an extreme case, driven in part by reckless practices within the mortgage industry. A typical downturn often starts off with a decline in homes sales — what is often referred to as a “cooling” or “sluggish” market — followed by a leveling, or even a decline, in house values.

Some major cities across the U.S. have already entered that phase. Seattle, Washington is an easy example to cite. A few years ago, home prices in the Seattle area were rising faster than almost every other city in the country. But over the past year or so, home values in Seattle actually declined. (We reported on this trend last month, and you can find additional coverage in this Seattle Times piece.)

The Trulia report mentioned earlier noted the following:

“But the downturn we’re entering is inherently different from the previous one that saw home values plummet over 40 percent, and is likely to be mild. Declining sale volumes will probably be followed by small declines in prices or possibly just a prolonged period of flat-to-modest housing price growth.”

Message to Sellers: You’ll Have to Work Harder

For a few years, home sellers had a fairly easy time generating offers from buyers. In some of the hottest housing markets, all you had to do was list your property and then wait for the competing offers to roll in. Bidding wars were common, and buyers often made offers above the list price in order to edge out competitors.

But things have changed. Bidding wars have become increasingly rare. And in many U.S. cities, the average time it takes to sell a home has increased.

There are two primary reasons for this:

  1. Rising home prices have created affordability issues in many housing markets, leading to a drop in demand.
  2. Inventory has risen in many cities as well, so buyers don’t feel the urgency they once did.

Of course, real estate conditions can vary greatly from one city or metro area to the next. Some markets are more competitive than others. But overall, housing conditions have clearly down-shifted.

A March 2019 Reuters article, which cited data from the Commerce Department, pointed out:

“Sales of new U.S. single-family homes fell more than expected in January, suggesting the housing market weakness persisted early in the first quarter, despite a moderation in mortgage rates.”

Economists polled by Reuters recently said they expect the U.S. housing market to remain sluggish through the first half of 2019.

None of this means that U.S. home prices will start to drop anytime soon. Despite a few exceptions, house values in most U.S. cities are still on the rise. And they’re expected to continue climbing over the next year.

For instance, a recent forecast from the housing research team at Zillow stated: “United States home values have gone up 7.2% over the past year and Zillow predicts they will rise 5.1% within the next year.”

What’s really changing here are the dynamics between buyers and sellers.

Through 2019 and into 2020, sellers might find that they have to work harder to land an offer. Over the coming months, we will likely see an increase in the number of price reductions, along with an increase in the average number of “days on market” for listings. Those are the typical side effects of a real estate downturn.