7 Things You Need to Know About the 2018 Housing Market

published Dec 15, 2017
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(Image credit: Aimée Mazzenga)

It’s that time of year when we reflect on the last 12 months, look dreamily out the coffee shop window, and think… “To hell with you, 2017! You were the [bleeping] worst. Let’s hope 2018 isn’t such a slimy armpit stain of a year.”

Ahem, er… right. It was a tough year for homebuyers, and lots of other people, too. Is there any relief in store? It looks that way. Just as many of 2017’s highlights were actually brave and inspired responses to its ugliness, the tight housing market is forcing industry reactions that should help first-time homebuyers — like slowing price gains and more new starter homes for entry-level buyers.

If one of your New Year’s resolutions is to buy a home, here’s what experts are predicting about the housing market in 2018.

1. Home prices will keep rising, but not as quickly

Both Zillow and the National Association of Realtors expect home prices to slow their roll a bit in the coming year, which is welcome news for first-time buyers.

That doesn’t mean they see prices falling, mind you, or even staying put. But 100 housing experts surveyed by Zillow expect home prices to rise by an average of 4.1% in 2018, while the NAR forecasts an even more modest 3.2% increase in home values. That’s down from 5.5% annual growth in 2017.

So, your local housing market is unlikely to be any cheaper than it was last spring. But at least that dreamy Colonial on the corner won’t spin out of your price range quite so fast.

2. Inventory is everything

Most housing economists say a lack of inventory — not enough homes for sale to meet demand — is the No. 1 reason prices keep rising like gangbusters. Indeed, the supply of homes for sale had fallen every month for over two years as of November.

The good news is, both Zillow and NAR expect more homes to hit the market next year — especially in the second half of 2018, and mostly in the form of new construction, with NAR forecasting a 7% jump in single family home starts. The first cities to see increased inventory will be Boston, Detroit, Kansas City, Mo., Nashville, and Philadelphia.

More homes for sale ought to ease buyer competition slightly, helping to contain the price hikes a bit and maybe even sparing you a bidding war or two.

3. Developers will build more starter homes, finally

New construction has lagged historic norms in recent years, and an astonishing amount of what has been built was at the high end of the market — because it offers builders a bigger payday. But Zillow expects that tide to turn next year.

For one thing, there’s only so many luxury condominiums you can build before you saturate the market and, I presume, grow tired of searching the world for rare marble and installing custom wine fridges.

But beyond that, says Zillow chief economist Svenja Gudell, “Builders cannot and will not ignore a hungry market. They’ll respond to the demand of more first-time buyers entering the market by increasing construction of new, entry-level homes.” Hallelujah!

(Image credit: Diana Liang)

4. Millennials will move to the suburbs

The catch, Gudell says, is that those new starter homes are going to be built in cheaper areas, farther from job centers and urban cores. It’s just too expensive – and often too challenging, given zoning restrictions – to build affordable homes in or near city centers.

Millennials may not prefer to live in the ‘burbs, but it’s where many of them will go if they want to buy a decent house in their price range.

5. Mortgage rates will go up

NAR expects mortgage rates to climb in 2018, up to 5% by year’s end. With the economy stabilized and near full employment, the Federal Reserve has begun slowly increasing interest rates over the past year, and is expected to continue doing so.

Higher mortgage rates aren’t good news if you’re looking to buy your first home, since it will cost more to borrow the same amount of money. So even if prices do slow down considerably – and higher rates could play a role in that – your purchasing power would go down at the same time.

6. Remodel is the new relocate

While some homeowners are eager to sell into a frothy market, others are justifiably nervous about jumping into a cutthroat competition with other buyers. Zillow expects that many would-be sellers will instead just remodel the home they have. That could further drag down inventory – meaning fewer homes on the market for you, and more competition for what’s left.

On top of that, a provision in the GOP tax bill would force homeowners to live in their homes longer if they want to sell it without paying a lot of extra capital gains taxes. That might convince even more potential sellers to stay put instead and remodel their kitchen or convert the attic into an extra bedroom.

And about that tax bill…

7. The new tax bill could turn all of this upside-down

The House and Senate are currently trying to reconcile their tax bills into a cohesive, unified version. Depending on what makes it into the final bill, NAR’s director of economic research Javier Vivas says the new tax legislation could be a huge wildcard they haven’t yet factored in.

“Both versions include provisions that are likely to decrease incentives for mobility and reduce ownership tax benefits,” Vivas says. On the other hand, he says, many renters will see tax cuts. “While more disposable income for buyers is positive for housing, the loss of tax benefits for owners could lead to fewer sales and impact prices negatively over time, with the largest impact on markets with higher prices and incomes.”

So, of course, we don’t really know what the new year will bring. But it certainly can’t be much worse than this one. (That is NOT a dare, 2018.)

Are you looking to buy a home in 2018? What do you expect from the housing market?