In the news: Housing market signaled potential future downturn in 2018

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The housing market over the last five years have been marked by a shortage of homes for sale and ever-rising prices. This dynamic has been especially prevalent in coastal markets like New York, San Francisco, and Los Angeles, which tend to be expensive anyway.

Expectations were that this was going to continue, but in 2018, the market started to cool. This past summer—usually a busy season for homebuying—was suppose to be “the most competitive housing market in recorded history,” according to one realtor, with prospective buyers engaging in bidding wars over the few houses that were for sale.

That didn’t pan out, suggesting that home prices have finally risen beyond what people can actually pay; wages have risen at a much slower clip than home prices. The housing market follows the old economic principle of price being a function of supply and demand, and demand is strong with the economy doing well and older millennials finally entering stages of life that lead to buying a home.

Coming out of the summer on the West Coast, homes that were expected to spark bidding wars instead lingered on the market, leading to huge spikes in inventory for sale. San Francisco, San Jose, and Denver—some of the hottest markets over the last five years—were among the cities that saw the biggest inventory jumps.

This fall, those same markets saw median listings prices drop considerably. It’s important to distinguish the difference between a listings price and a sale price, because listings prices can still be bid up, but usually listings prices are leading indicator as to where home prices are headed.

If that holds true, 2019 could see West Coast home prices drop, which other than a few exceptions like 2008 rarely happens.

Speaking of the 2008 housing collapse, one might naturally be alarmed by the prospect of a housing slowdown, given the financial calamity that occurred as a result of the last housing slowdown. But conditions today are almost the complete inverse of conditions in 2008.

For example, most of the ills of the housing market leading up to 2008 were marked by lending practices that ranged from irresponsible to downright reckless. Ill-advised mortgages were spread through the entire global financial system via complex financial instruments, and when defaults started to rise, the system collapsed. But lending today is incredibly strict, so strict in fact that some in the industry believe the lessons of 2008 were over-learned.

There was also a housing surplus in the years prior to 2008. Regional home building companies had recently consolidated to form large national builders, which pumped out houses at dizzying pace. When the housing bust happened, the surplus of housing made price drops worse. But as mentioned, today there’s a housing shortage, even with the recent jumps in homes for sale. This means any type of slowdown would have a hard floor as far as home prices go.

It’s also possible that instead of home prices dropping, the pace at which they go up merely slows down or even flat lines. The overall strength of the economy remains strong, despite the recent stock market selloff. Unemployment remains remarkably low, and the U.S. is still gaining jobs. Wages continue to rise. The general conditions for the housing market to do well remain, even if a few high-priced markets went up a little too fast. Stay tuned.

Read more here.

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