More than halfway through 2018, the central story of the U.S. housing market continues to be affordability. 2018 may see one of the sharpest overall declines in affordability, even as Millennial buyers have been struggling to afford their own homes for nearly a decade.
2018 may see even more drops in affordability due to the combination of inadequate housing stock, rising interest rates and increasing numbers of people seeking homes or rentals. In some markets, this process is continuing even as it seems that it should have long ago reached a peak. For example, in housing markets like those seen in Los Angeles and San Jose, the median home would take the average wage earner in those cities more hours of work each week than most people are awake.
This leads to some interesting and potentially startling conclusions about the near-term future of the U.S. housing market. While not every city features severely overpriced housing, the number of areas throughout the country that do should serve as a red flag. Although 2018 may continue to see declines in affordability, with some experts estimating that total affordability may drop by a total of up to 15 percent by the end of the year, the skyward shooting prices cannot be sustained forever. Baby Boomers looking to downsize their homes should consider the many factors that point to a serious housing market correction coming in the next five years.
For starters, more housing stock will eventually be completed, and much is currently under construction. This will have a delayed effect in lowering prices, but it could send them tumbling. Interest rates are also slated to rise substantially. When they get back closer to historic norms, it will mean that a large swathe of potential homebuyers will no longer be able to afford the payments. This will put a further damper in the market.
And finally, the fact that so many younger homebuyers cannot even dream of affording a starter home means that one of the most fundamental engines of the housing market — young people looking to form families — is priced almost completely out. Historically, it’s a good bet that home prices will correct back to levels where family formation is once again affordable.
All this means that those looking to downsize or cash out at the top of the market may be well advised to make 2018 their year to sell.