For 2018, the real estate market in most parts of the country saw significant, sustained growth. Some cities even experienced double-digit appreciation with houses selling well over asking price.
Home values across the U.S. rose 8% in 2018, which was 0.7 percentage points faster than the previous year. However, this probably isn’t sustainable. Zillow forecasts the annual appreciation rate to drop to 6.8%. Still, the median home value rose to $218,000, the highest it has ever been.
Right now, there is a steady level of more demand than supply, but does that mean the market is right at the end of its growth streak?
New Downturn Would Be the Product of Outside Factors
The last downturn the country experienced isn’t likely to happen again. That’s because it was the result of bad loans that left borrowers unable to pay mortgages when the rates went up and property values plummeted. Today’s market is different. Loans are much harder to obtain and require stringent ability to repay requirements. Many loans now are fixed for thirty years and come with a lower risk of default. So, there’s really no bubble in threat of bursting because of bad loans. A new market crash would have to be the result of outside factors.
If you look at the rest of the economy, wages are up and have been consistently for the past 9 years. This is a strong indicator that although people have the means to purchase property, there just may not be anything for them to purchase, especially considering the lack of starter homes.
Investors Are Still Unsure
Investors at this time are still unsure about investing. They may worry about investing at the peak and the market crashing, leading to them holding supply with little demand. It really comes down to several issues: opportunity cost and the fear of the unknown. To understand if there is going to be a downturn, investors have to look outside the market to identify signs that things could go south.
What Might Cause a Downturn?
Will rising interest rates in addition to global trade wars be the catalyst for a U.S. housing market crash? Raising interest rates is often thought to be a move to cool an economy. Every major recession has corresponded with rising interest rates. Then markets crash, which causes rates to go back down.
There are several concerns that the dollar may weaken as well due to tariffs. Will companies choose to build new facilities or wait to see how the economy reacts? All of these things could cause real estate prices to dip and supply to catch up with demand.
A Spotlight on the West Coast
The West Coast has been home to some of the hottest real estate markets in the country. San Francisco and San Diego continue to be some of the most sought-after zip codes with prices expected to keep rising in 2019. San Diego’s market is seeing some decreases in properties sold but that is due to lack of availability, not a lack of buyer interest. In Los Angeles, new areas are being revitalized like downtown, which is turning its focus to urban infill after decades of sprawl, so this market’s continued growth seems plausible in 2019.
Seattle has been rated as the hottest city in the U.S. for real estate. It’s a city that has great jobs from some of the most prestigious brands in the world. Lots of people want to live there and the average home price is expected to hit $702,000 by the end of the year.
What’s the Smart Investment Plan for 2019?
There is no magic ball, but 2019 could see declines for some cities, however, it’s unlikely for the west coast. The “where” you should invest in will be determined on many factors, top of which would be the availability of property with nothing lower than C-class neighborhoods. You’d want to shoot for A-class or B-class, but they’ll be harder to find.
Investing in cash flowing properties is also a strategic approach. As long as you are making more income than it costs to own, you are growing your investment regardless of what happens with the value. When prices drop, you’d only be impacted if you sold, not while it’s a rental property. Savvy investors purchase property that produces income with price appreciation as an added bonus.
Whether you are ready to invest or already have, real estate will always be a great way to build personal wealth. However, a keen eye needs to stay on the economy as the best indicator for possible future downturns.