Money Management

Housing and Real Estate Predictions for 2020

By  Elizabeth Blessing

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Some of the biggest experts in the U.S. housing market have come out with their predictions on what we can expect for 2020. The much-anticipated housing forecast from hit the Internet late last year with a plethora of colorful graphs and charts.

Not to be outdone, real estate brokerage firm Redfin published their market predictions as well, making some interesting forecasts about bidding wars and climate change. And last but not least, online real estate database company, Zillow, has done an about-face, no longer forecasting a 2020 U.S. recession leading to a significant slowdown in home value appreciation and demand.

In this roundup, we take a look at these real estate predictions for 2020—with a special nod toward some of the more surprising forecasts, including how the recent coronavirus outbreak has already begun to impact the housing market and what that might mean for homebuyers and sellers.

Where Interest Rates Go, So Goes the Market

Most experts seem to agree that interest rates are a key factor that will drive the housing market this year. 2019 proved to be a banner year for low rates with the average 30-year mortgage rate falling from 4.51% in January to about 3.74% in December. To put that in perspective, a 30-year $250,000 mortgage at the January rate would have cost you $1,268 a month, while at the December rate you would have shelled out $1,156 a month.

While that $112 monthly savings may not seem like much, over the course of a 30-year mortgage the savings add up. At the higher rate, you’d pay a total of $456,480 for your mortgage and at the lower rate you’d pay $416,160—a difference of $40,320 over 30 years. That’s some significant pocket change.

The impact of low interest rates wasn’t lost on homebuyers last year. Around springtime, rates began to lower and buyers who previously found themselves priced out of the market found they were back in the game. And for those buyers who had money to spend, lower rates meant they could afford more house for their money.

Both Redfin and predict low mortgage rates throughout 2020—hovering around 3.8% for a 30-year fixed-rate mortgage. Low rates combined with increasing rents throughout the country should continue to boost homebuying demand, particularly for entry-level or starter homes for first-time homebuyers.

“The market right now is reflective of really good interest rates,” says real estate broker, Don Chin, of Community Realty in Humboldt County, California. “Ultimately, what really affects the growth or the non-growth in real estate is the interest rate you’re given… As long as interest rates stay at 4% or lower, people are going to want to jump in because if you do the math and look at renting versus buying, you’re not really paying a whole lot more for buying a house versus renting.”

High Demand and Low Inventory Could Spark More Bidding Wars

The bidding wars common in the housing market in the early to mid-2000s will make a big comeback in 2020, according to Redfin. A bidding war is when prospective homebuyers compete against each other to buy a property, often escalating the competition by incrementally increasing their bids.

The lack of new homes for sale combined with low mortgage rates could spur buyers to make higher-than-asking-price bids to gain their foothold in the market. In October 2019, just 10% of offers written by Redfin agents faced a bidding war, which marked a 10-year low. The company expects that to change, with an estimated 25% of offers to face bidding wars in 2020. While bidding wars put home sellers in the catbird seat, they leave buyers frustrated as they find themselves constantly outbid by the buyer with the deepest pockets.

The Financial Impact of Climate Change

It’s no secret certain regions of the country have seen catastrophic floods, fires, and hurricanes in recent years. According to Redfin, the financial consequences of climate change will have a bigger impact in 2020 on the decision making process for homebuyers.

That’s because the increase in natural disasters has led to increasing rates for the specialized homeowner’s insurance that covers these events. Prospective homebuyers in these areas need to consider the rising costs of flood and fire insurance not just for today, but the potential for increases throughout the duration of their ownership. Buying in these areas also can affect resale value in the future, especially if insurers raise rates (or even refuse coverage entirely) on properties located in high-risk areas.

Will a Recession in 2020 Tank the Real Estate Market?

The answer to that question seems to depend upon who you talk to. According to Zillow’s market predictions issued late last year, the answer is a resounding no. Zillow pointed to the resilient U.S. economy, low unemployment rate, and wage growth as factors that will keep the economy chugging along.

However, this contradicts their research in July 2019 that surveyed 100 real estate experts and economists who predicted 2020 would be the start of the next recession, which would then lead to a housing slowdown. And, of course, all of these predictions were before coronavirus hit the news, an event that has some pundits predicting a pandemic that will plunge the intertwined global economy into a recession. This economic uncertainty could impact prospective homebuyers, who may decide to sit on the sidelines this year instead of entering the housing market.

Famed value investor and Berkshire Hathaway founder, Warren Buffett, has his take on the impact the coronavirus will have on the economy, reminding investors not to buy or sell the markets based solely on the day’s headlines. For some businesses with sound fundamentals, a drop in prices represents an opportunity to pick up shares at a good price.

In his annual letter to investors, Buffett says that while there could be major drops in the market (even up to a 50% magnitude or greater), he predicts equities will outperform bonds for years to come as long as low interest rates and tax rates remain the key economic drivers.

Coronavirus and Real Estate—What’s the Connection? published an article about how the coronavirus is impacting the real estate market in the United States. Global financial markets have already reacted to the virus, news of which on any given day has been credited for huge swings in the stock markets since the first of the year.

The U.S. housing market has seen “the coronavirus effect” via dips in mortgage interest rates. Some investors have reacted to the recent uncertainty by removing their money from the stock markets and investing in what they perceive as safer investments, such as U.S. Treasuries. When the market for U.S. Treasuries is robust, bond yields fall and mortgage rates that follow the 10-year Treasury yield also plummet. This is what we saw in 2002-03 with the SARS outbreak and what we’ve seen recently with coronavirus.

The article also points out that the coronavirus could impact an already sluggish market for U.S. luxury real estate. Until recently, wealthy foreign buyers from China had represented a growing percentage of sales for real estate in high-end markets such as New York City and San Francisco. Chinese travel restrictions could impact real estate sales for these markets, however, softening sales in the $1 million-plus luxury home market.

In the Market for a House? A Few Tips for Homebuyers…

In a tight real estate market where you could find yourself bidding against other prospective homebuyers, there are a few things you’ll want to do beforehand to ensure you buy the home of your dreams at a price you can afford.

First, understand the difference between being pre-qualified versus being pre-approved for a loan. While both are steps in the mortgage application process, there are significant differences between the two.

Pre-qualification is the first step and it’s based on the information you provide the lender that they use to generate a preliminary estimate on how large a loan you could possibly get. Pre-approval, however, is the second step that the lender does to verify your data (such as your income, credit history, and credit score) to generate a written conditional commitment listing the loan you’ve been approved for, including the amount and terms. Since pre-approval only happens after a lender has confirmed your creditworthiness, it generally carries more weight with home sellers than a pre-qualification.

As a homebuyer, you’ll increase your chances of having your offer accepted if you get pre-approved before you go home shopping. In fact, in a tight market, some sellers may not even accept offers unless they’re accompanied by a pre-approval letter from a lender.

Because lending standards can be tight, serious homebuyers should also look to clean up any outstanding issues on their credit history that could give their lender reason to deny the loan or issue a loan with unfavorable terms (such as a high interest rate). Review your credit report for inaccurate information. Pay down the balances on your credit cards to reduce your debt-to-income ratio. Check your credit score (known as your FICO score) and look for ways to improve your score. A higher credit score will mean you’ll qualify for a mortgage with a lower interest rate, which over the life of the loan could save you thousands of dollars.

And don’t forget to check out any government programs available that make homebuying more affordable for first-time homebuyers. While it used to be that affordable housing lotteries were only for renters, many state and local governments offer housing lotteries aimed at making homebuying more affordable, particularly in tight markets like New York and San Francisco. For more information, be sure to check out this housing lottery question and answer guide.

Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.

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