Are Home Prices Peaking?

--by Jeff Ostrowski

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After the Great Recession, U.S. home prices soared. Then they rose some more.

Now that appreciation is slowing, American homeowners and would-be buyers face a crucial question: Can property prices fall again? Or will they merely return to the measured pattern of appreciation that was common for decades before the housing boom of 2005 and 2006?

The consensus among housing economists is that home prices will rise in 2020, but at a subdued pace. While residential real estate values jumped at a double-digit rate early in the recovery, gains now are in the single-digit range.

The National Association of Realtors (NAR) says the median price of existing single-family homes sold in the third quarter of 2019 was up 5.1 percent from the third quarter of 2018. The National Association of Home Builders/Wells Fargo Housing Opportunity Index, which looks at new and existing houses and condos, reaches a similar conclusion, saying prices rose 4.5 percent in the same period.


NAR Chief Economist Lawrence Yun forecasts 3 percent appreciation for 2020. Zillow economist Jeff Tucker agrees, likewise predicting price increases in the low single-digit range.

“Our baseline forecast is for things to settle into a much more slow and steady pace,” Tucker says. “We had really rapid home-value appreciation for a few years, and we’re definitely seeing it slow down. But we don’t see prices falling at the national level.”

For homeowners shaken by the housing market roller coaster of recent years, that’s a reassuring forecast. However, one noted contrarian says prices could drop.

“I wouldn’t be at all surprised if home prices started falling, and it could be accompanied by a recession,” Yale University economist Robert Shiller told Bloomberg Television in September.

Shiller, a Nobel Prize-winner who co-created the Case-Shiller Index of home prices, correctly warned during the housing bubble that prices could fall.


Where prices are falling

Indeed, prices are declining in a few pockets of the country. In Silicon Valley, where the price tag on a typical home tops $1.2 million, the median price dropped 4.6 percent from the third quarter of 2018 to the third quarter of 2019, according to NAR.

That’s not the only costly market where prices are in retreat. In San Francisco, sales prices were down 2.5 percent. In San Diego, they fell 0.8 percent. Housing economists say California prices simply rose too far too fast.

“A lot of markets are hitting a bit of an affordability ceiling,” Tucker says. “Prices couldn’t rise much further without getting completely out of the reach of most first-time buyers.”

In a few other instances, weak local economies created a drag on home values. In Peoria, Ill., the median price fell 5.9 percent, NAR says. In Elmira, N.Y., prices were off 5.3 percent. In Cumberland, Md., they dropped 4.5 percent.

For much of America, however, homeowners can expect a soft landing rather than a crash, says Ken Johnson, a real estate economist at Florida Atlantic University and co-creator of the Beracha, Hardin & Johnson Buy Vs. Rent Index.

“There’s just no reason to expect declines in most markets,” Johnson says. “It’s far more likely that we’re going to see a slowdown in appreciation. We shouldn’t expect to see that 5, 6, 7, 8 percent appreciation.”

That slowdown is something of a head-scratcher. After all, the housing market has many supply-and-demand tailwinds at its back. The U.S. unemployment rate stood at a rock-bottom 3.6 percent in October 2019 – and, of course, steady paychecks embolden renters to become owners.


Millennials and the housing market

Meanwhile, the stock market hit record highs in November, and mortgage rates remained near historic lows. What’s more, the massive millennial generation finally is in a financial position to buy.

“There is a big surge of population of people right around age 30,” Tucker says. “That’s the age at which there’s the steepest transition to homeownership.”

Millennials, the generation born from 1981 to 1998, carry hefty student debts. And many members of the generation entered their working years amid a difficult job market. Despite those hurdles, millennials made up 37 percent of home buyers in 2019, NAR says.

In another shift from the bubble of 15 years ago, builders are constructing comparatively few new homes.

“That’s one of the things that’s radically different this time around,” Tucker says. “We’ve had a deficit of homebuilding for several years.”

In one quirk of today’s housing market, the dearth of new homes is limiting property prices. Amid what Yun calls a shortage of housing, home values have outpaced wage gains.

“We just don’t have enough inventory,” Yun says. “Lack of supply is pushing up prices a little too fast.”

Even as home prices rebounded strongly after the Great Recession, wage gains remained in the 2 percent to 3 percent range. Put another way, the National Association of Home Builders/Wells Fargo Index says home prices soared 74 percent from 2012 to 2019. Yet median household incomes grew by just 16 percent.

As a result, many Americans who don’t own homes have decided to remain renters. Strong demand for apartments has led to a building boom for rental units. And national landlords such as Invitation Homes have snapped up tens of thousands of single-family houses that once would have been bought by individual homeowners.

Rising home prices have left many Americans facing the rent-or-buy conundrum. Workers who need to move every few years to maximize their earnings shouldn’t buy, but instead should rent and be sure to save and invest, Johnson says. On the other hand, those who plan to live in the same area for years – and who lack the discipline to save and invest -- should buy homes.

“Ownership, at its core, is a forced savings,” he says.

While Johnson says homeowners in most of the country are likely to see modest appreciation, he worries about three metro areas where home prices have soared: Dallas, Denver, and Houston.

“All three of those metro areas largely escaped the last housing crash,” he says.

Strong job markets in all three cities have spurred housing demand, and Johnson believes all three are sharply overvalued.