It’s that time of year again, when housing forecasters make predictions about the year ahead. We do a bit of forecasting ourselves here at first tuesday, recently forecasting a bumpy year ahead for California’s real estate market.
But real estate is an exceptionally local phenomenon, as trends may vary depending on your city, or even within your neighborhood. Zillow has released its ideas about 2019’s housing market, including which U.S. cities will see the most growth this year.
California comes out on top in terms of Zillow’s hottest housing markets, with three cities on the top ten list:
To calculate each housing market’s “hotness” score, Zillow used each area’s:
- home value and rent appreciation forecast;
- income and population growth for 2016-2017;
- current unemployment rate; and
- the number of new job openings.
Hot cities in a cooling market
After years of rapid acceleration, home prices finally began decreasing across California in the third and fourth quarters of 2018. Rising interest rates and fewer home sales in 2018 point to falling prices in 2019, too.
Zillow acknowledges the cooling experienced across most U.S. housing markets. Still, it sees some possible growth in parts of the country where there is the most potential for job growth. For example, San Jose — occupying the top spot for hottest housing market — currently has the most job openings per resident, along with one of the highest per capita incomes.
This forecasting model reflects a return to market fundamentals — that is, an individual needs income to buy or rent a home. Therefore, the quantity and quality of jobs in a region directly corresponds with the health of that area’s housing market. Historically, this basic fact has led to home prices increasing on average around 3% each year, consistent with inflation and incomes.
In contrast, California’s housing market has been jostled by unstable market factors over the past few years, evidenced by wild price swings despite a consistently flat home sales volume. These destabilizing factors have included:
- the interference of federal stimulus during the recovery from the 2008 recession, which produced a premature mini bubble;
- the massive speculator presence in 2012-2014; and
- a lack of new construction throughout the recovery, resulting in historically low inventory levels and a massive supply-demand imbalance.
Before California sees a return to more normal levels of home price growth, it will need a reset. This means home prices will continue to fall in 2019 and well into 2020 — in most areas. Some desirable neighborhoods will see less change, but the overall expectation for California’s home prices in the next two years is down. When prices bottom around 2020-2021, homebuyers will return in greater numbers, eager to buy once home prices more closely match their incomes.