Should we be worried about the US real estate market entering another housing bubble in 2020? Let’s take a look at what the top US housing market predictions and trends are telling us.
Ever since the Great Recession ended in 2009, the United States has experienced an economic expansion that is currently considered the second-longest in American history. Exactly ten years later, the national real estate market has come a long way since those dark days. Home values continue to rise in most major markets and Zillow expects them to increase a total of 4.1% nationally by the end of 2019. The increasing number of buyers combined with a low inventory of available homes for sale are also contributing to home price increases.
However, what goes up must come down. Since demand has been fueling house prices for a few years now, many are concerned that a new housing bubble has started to form in the US. After all, it is the bursting of the housing bubble which caused the Great Recession from 2007 – 2009 and some people are still dealing with its effects to this day. So it’s only natural to wonder if a new real estate recession is coming in 2020 and, if so, how will it impact real estate markets, investors, buyers, sellers, and homeowners? Here’s all you need to know.
Related: How to Recession-Proof an Investment Property
What Is a Housing Bubble?
Before answering our main questions, let’s quickly explain what a housing bubble is and what causes it. According to Investopedia, a real estate bubble is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse. The reason for the increasing demand could be due to various reasons like:
- An upturn in general economy that encourages homeownership
- An increase in the population entering the housing market
- Low levels of interest rates that make housing more affordable
- A lowering of underwriting standards that brings more buyers to the market
- Excessive risk-taking by mortgage borrowers (both home buyers and real estate investors) based on unrealistic appreciation estimates
These variables can combine to cause a housing market bubble. Of course, home prices are driven by the law of supply and demand. The supply of housing is slow to react to increasing demand simply because it takes a long time to build a house or (in highly developed areas) there isn’t any more land to build on. So, with so much demand but limited supply, home prices will naturally rise. Take a look at the chart below of the All-Transactions House Price Index for the United States from the U.S. Federal Housing Finance Agency and notice how this is exactly what had happened before the housing crisis of 2008 – 2009.
Source U.S. Federal Housing Finance Agency
At some point, however, a few things will trigger demand to decrease. These are mainly an increase in mortgage interest rates and a downturn in general economic activity. Combine these with expensive prices and homeownership becomes out of reach. Homes that are already owned also become unaffordable which leads to default and foreclosure. As housing inventory catches up, this will add to the current supply available on the market. Meaning, supply will start increasing at the same time demand decreases and risk-takers leave the market. In turn, this leads to a sharp drop in home prices and the housing bubble bursts which, in turn, can lead to a recession.
Related: The First YOY Decrease in Real Estate Prices in Years
Is a New Recession Coming in 2020?
Zillow has performed a Home Price Expectations Survey where more than 100 real estate experts and economists were asked to give their predictions of the US housing bubble and when the next recession will hit. Results from the survey revealed that nearly half of respondents said they expect the next real estate recession to begin in 2020, with the first quarter being the most cited. Moreover, in its more recent Economic Policy Survey, the National Association for Business Economics asked over 200 of its members for similar predictions. The results: 38% of respondents believe a recession will begin in 2020 while 25% anticipate one starting in 2021.
In short, most experts predict that yes – the next recession is expected in 2020. Having said that, experts also agree that even if a recession hit next year, this time will be different. Respondents of both surveys believe that the US housing market will not be the main cause for the next recession. According to George Ratiu, Senior Economist at Realtor.com:
Economic activity is cyclical, so yes, undoubtedly we will face another recession at some point in the future, but we do not expect it to be anything like 2008…The next recession will likely be driven by factors outside of housing, such as a prolonged trade war, cutbacks in corporate spending or contagion from a European recession. Unlike 2008, mortgage underwriting has been more disciplined and regulated, which should provide a more secure foundation for housing during the economic ups and downs.
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US Real Estate Market Predictions 2020
In order to understand the new real estate recession and answer when will the next housing bubble burst, you need to know the current housing market trends in addition to the 2020 housing market forecast. Here’s a summary of what experts expect to see in the coming year regarding property prices and values, affordability, mortgage rates, inventory of homes for sale, and demand and whether or not the housing market bubble will burst in 2020:
1- Home Prices Are Expected to Increase
Some aspiring home buyers are hoping for prices to crash in the coming year as they did during the Great Recession. However, real estate experts don’t see this happening in 2020. In order for a recession to move prices, it would need to make a significant dent in either housing supply or demand. That’s difficult to happen now at a time of low unemployment and undersupply in so many housing markets across the United States.
Moreover, demand is also still going strong as more members of the “house hungry” millennial generation are entering the real estate market wanting single-family homes. This imbalance between supply and demand will only cause home prices to increase. In fact, a new report from real estate data company CoreLogic suggests that prices still grow at an annual basis and that the annual home-price growth will increase by 5.4% by July 2020.
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2- Mortgage Rates Are Expected to Stay Low
Economists say that chaos in the real estate market is what caused the housing bubble to burst last time. Lenders offered risky loan options and borrowing incentives, mortgage underwriting standards declined gradually during the boom period (2004 to 2007), and the use of automated loan approvals allowed loans to be made without appropriate review and documentation. As soon as the US housing bubble burst, homeowners defaulted and the real estate market crashed. Today, lending laws are considerably stricter, so only the most qualified borrowers can secure a mortgage. This means the housing market is on much stronger ground.
A big wild card in all of this is mortgage rates which are expected to finish out 2019 at 4.1% according to Freddie Mac data. Zillow’s survey respondents believe that the Federal Reserve’s actions with regards to interest rates can be the biggest reason for the looming recession. They noted that if the Fed raises rates, taking out a mortgage will be more costly and some buyers will be shut out of the housing market. As a result, this could slow down the economy and lead to a recession. According to Bankrate’s Q3 Economic Indicator Survey, however, the majority of economists say the Fed will continue to lower interest rates in an attempt to delay the next recession. The housing market, therefore, could still get a boost from favorable mortgage rates in 2020.
3- Home Buying Demand Is Expected to Be Low
Home sales have been slow since the beginning of the year and experts have reasons to believe this real estate market trend will occur again in 2020. The majority of experts surveyed by Zillow said that home buying demand will be even lower in 2020 than in 2019 despite favorable mortgage rates. The main reason, of course, is that buyers simply can’t afford the cost of owning a home as it’s still out of reach for the average wage earner.
Still, lower mortgage rates are making it affordable to buy homes and millennial buyers are entering the real estate market with increasing force. As available housing inventory is still low in many markets, this pick-up in buying is nudging price growth up. Experts say that if home-price growth continued, then the demand for buying a house will start to fade over the coming year as homes become unaffordable. These are signs of fading demand and the possibility of an impending recession.
Related: How Investors Can Survive a Real Estate Market Downturn
Cities That Could See a Housing Crisis in 2020
While it’s good to look at housing market trends on the national level, you must remember that real estate is local and market conditions differ from one state/city to another. So, while the market is not expected to experience a major loss on the national level if the next recession hits, some real estate markets are likely to take bigger hits than others. So, which cities in the US do experts believe have a higher chance of a housing market crisis in 2020?
24/7 Wall St. reviewed median home price data for 123 metropolitan statistical areas from the real estate data firm ATTOM Data Solutions. Based on this data, it identified 15 US MSAs where home prices are at least 20% higher than at their nearest pre-recession peak. These cities are home to growing job sectors and attracting new residents and families. Thus, they’re experiencing growing demand for housing which is driving up home prices. Furthermore, some of these cities are also some of America’s fastest-growing housing markets where home values are less affordable than the national average. Should the housing bubble burst in 2020, the following markets will be among the most vulnerable:
- Seattle–Tacoma–Bellevue, Washington
- Durham–Chapel Hill, North Carolina
- Boise City, Idaho
- Spokane-Spokane Valley, Washington
- Portland–Vancouver–Hillsboro, Oregon-Washington
- Provo-Orem, Utah
- Salt Lake City, Utah
- Urban Honolulu, Hawaii
- Colorado Springs, Colorado
- San Jose–Sunnyvale–Santa Clara, California
- Nashville-Davidson-Murfreesboro-Franklin, Tennessee
- Austin-Round Rock, Texas
- Fort Collins, Colorado
- Denver–Aurora-Lakewood, Colorado
- Greeley, Colorado
The Bottom Line
When you look at current real estate market trends, you’ll see that there are plenty of signs that the housing market is in bubble territory. The majority of experts surveyed by multiple reliable sources admit that the risks of a recession are rising. However, while the bursting of a housing bubble was the main cause that ushered in the Great Recession, experts say the housing market won’t be the cause this time around. So, you can breathe a sigh of relief as a housing market crash is not in our real estate market predictions for 2020. The US housing market 2020 will be even better positioned to make it through the next recession without significant losses.
The US economy is still strong and many metrics (job growth, wage growth, low unemployment, and GDP growth) are the best they’ve been in years. As long as lending laws remain strict and the Fed lowers rates to allow growth, any potential downturn will be shallow. Our advice to real estate investors is to still have an emergency plan in case the housing market swings in the wrong direction. The real estate market is cyclical and investors will inevitably experience periods of upswing and downturns. So, always have cash reserves and be proactive to mitigate your losses if the housing bubble bursts.