- The housing market is cooling and appears to be in the early stages of a cyclical downturn, as evidenced by declining home sale volumes.
- This spring, prices are still likely to continue rising at a modest pace, but buyers are likely to benefit from incrementally more bargaining power than they have been used to.
- Should the downturn continue unfolding, it is likely to emerge as a mild one, and it may or may not ultimately bring prices into decline—it could merely involve only a prolonged period of slower price growth.
Cyclical housing market downturns occur roughly every 10 years, and they typically don’t happen overnight. Instead, they play out steadily over a few years, first showing up in sales volumes and later—usually a year or two later—in prices. The housing market currently appears to be in the early stages of such a downturn: declining sale volumes and other market indicators indicate that it is cooling off, gradually pivoting away from the heated sellers’ market of recent years.
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.
In the near term, home prices are still likely to rise through the Spring, but at a slower pace and amid a slow drift of bargaining power toward buyers. Sellers should expect price cuts to be more common, and properties will likely take longer to sell, causing inventory to build up. More inventory, in particular, will slowly ease the competition between buyers, allowing them to negotiate with this spring’s sellers a shade more confidently.
The volume of home sales, historically a leading indicator of changes in home prices that follow a year or two later, has steadily slowed its pace of growth since 2014, plateauing in 2016 and 2017, and actually falling since spring 2018 (existing home sales rose sharply in January, but are likely to continue falling in the near term on a seasonally adjusted basis). Anticipating the future path of prices from the current path of sale volumes is not divination. Rather, it reflects the increasing difficulty that sellers face in obtaining their initial asking prices, and the fact that homes are staying on the market longer as a result, or even failing to sell altogether. Housing market indicators such as days on market (which have finally stopped declining), inventory (which is finally building up), and price cuts (which are growing more common), all indicate that sellers are facing greater difficulty in selling. Eventually, these difficulties stymie price growth or even cause prices levels to recede. Indeed, there are indications that price growth is already slowing down and it is possible that by fall or next year prices might modestly decline.
The transition from a sellers’ market to a buyers’ one is most advanced in expensive West Coast cities, where appreciation has been most rapid and affordability has eroded the most, suggesting that decreased affordability is playing an important role in driving the downturn. Previously hot West Coast markets like Seattle, Southern California and the San Francisco Bay Area have cooled the most in the past year. Some inland markets which tend to be destinations for those moving out of expensive areas on the west coast, such as Las Vegas and Denver, have also cooled, but so have other markets such as Chicago and Dallas. At the same time, markets in the East Coast including New York, as well as some markets in the Midwest such as Kansas City have yet to see sale volumes decline and are still on the upswing.
In recent years, historically low inventory levels drove the sellers’ market and helped rapidly push prices higher in recent years by forcing buyers to compete over fewer available homes. This gave sellers the upper hand in negotiating more favorable deals with higher final sales prices – and those prices were then used as “comparables” that other sellers used to set their own, higher prices later on. But this is changing. As home sales slow down and for-sale inventory builds up, sellers are slowly beginning to lose their advantage over buyers.
In a survey conducted at the end of last year, Trulia asked Americans if they felt that 2019 would be better or worse than 2018 for selling and buying: While more Americans felt that this year would still be better for selling than for buying, the gap has narrowed substantially from last year. Of course, buyers and sellers don’t have a better crystal ball than anyone else, but housing market shifts have an element of self-fulfilling prophecy: if enough people believe prices are peaking then sellers hurry, buyers hold off and prices fall. Bigger swings in sentiment are often triggered by events whose perceived effects are overblown, such as small changes in Fed policy, but whose impact on the housing market via sentiment can be large. While deflating optimism on both sides of the housing market seems to prelude a downturn, will the next downturn be as sharp as the last one?
In the lead-up to the Great Recession, reckless lending and record-breaking rates of residential construction fueled an unprecedented number of home sales and a steep run-up of home prices. Today, in contrast, price appreciation is largely driven by a dearth of residential construction which has an outsized influence on inventory, greatly suppressing it. Every new home built (or not built) not only contributes directly to inventory, but also indirectly frees up the homes of trade-up buyers, potentially creating an entire chain of trade-up moves (trade-up buyers make up about two thirds of the buyer pool). Residential construction is still struggling to recover from the last bust, and there is little reason to think that it will revert to its level from the early 2000s any time soon.
This spring home shopping season, sellers won’t have quite as much power in dictating the terms of housing transactions, but buyers will continue to face relatively high prices and affordability woes. As prices will still grow, the amount of savings needed for an adequate down payment will also rise, keeping the squeeze on the most budget-conscious buyers in particular.
There almost certainly won’t be a steep drop-off in home values like the one that occurred a decade ago, though the unfolding slowdown will be more palpable in some pricey markets. Instead, any cooling in appreciation is likely to be moderate and happen gradually – likely showing up as either an extended period of flatter home price growth, or as a modest price decrease in the next couple of years. It remains to be seen how for-sale inventory levels evolve and how that impacts the future path of prices.
 We will continue to call the downturn by that name even if prices ultimately don’t decline, because of the decline in sale volumes.