This article originally appeared on the BUILDER website.
The economy is headed for a slowdown, but its effect on the housing market won’t be as tumultuous as the downturn that led to the Great Recession, Metrostudy chief economist Mark Boud told a standing room-only audience at the 2019 Metrostudy Housing Outlook Breakfast.
Boud sees overinflated housing prices causing bubbles in some hot markets where affordability is a top issue. Nevertheless, current conditions are different from those that builders faced during the run- up to 2008’s housing collapse. “The last time, the country had an oversupply of houses that were overvalued,” he said during the event at the International Builders’ Show in Las Vegas. Currently, houses in some markets are overvalued but overall supply remains low, he said.
The housing cycle is in the “top or middle of the eighth inning,” Boud said, and although he sees a mild to moderate price correction coming next year, he is not concerned about long-term effects. “We predict that we’ll come back to equilibrium by the end of our five-year forecast,” he said.
He noted that the U.S. is facing a shortage of about 3.5 million homes—almost all of them in lower price ranges. Housing is not as in demand among move-up and luxury buyers, because many of them are putting off a new home purchase in order to hold on to ultra-low mortgage rates on their current homes.
“Potential buyers of move-up homes are staying in place and expanding or remodeling because they don’t want to give up their current interest rate,” Boud said. “Entry-level buyers are not as concerned about this because they don’t have a mortgage.”
This trend will continue as Boud predicts that interest rates will “gradually and erratically climb during the next 24 months” topping out at close to 6%.
He noted that another drag on the economic health of the housing industry comes from federal government policies, including recent Trump administration tariffs on lumber and Chinese building products that have increased the cost of building a new home. “In the near term this will continue to translate to higher costs,” Boud said.
President Trump’s efforts to slow immigration have resulted in increasing costs for builders, many who struggle with shortages of qualified labor, Boud said. In addition, the growing national debt is negatively impacting the housing sector. Trump’s recent tax cuts will only add to the debt, which surpasses $22 trillion, he said.
“We’re increasing the expenditures on debt and decreasing it on economic growth,” he said. “This causes higher interest rates, weakens the dollar, and takes away money for things like infrastructure spending. It leads to higher inflation and a higher risk of financial collapse.”
Despite these overarching predictions, Boud urged attendees to pay attention to the conditions in their markets. “Everything is local,” he said.
Boud was followed by a panel of experts led by Tim Sullivan, managing principal of Meyers Research. The group talked about how to entice U.S. home shoppers to consider new home construction.
Mary Kaye O’Brien, director of insights for Zillow, said builders need to show buyers the advantages of owning a new home compared to an existing one. “It’s that value proposition that you have to talk about,” she said.
Simple changes can make a big difference in how consumers interact with a home builder, said Metrostudy regional director Paige Shipp. For instance, she recommended that builders include the address and directions to their model homes at the top of their home page. “Don’t make it so difficult to find your models,” she said.
Builders can also look to previous customers to help them sell homes, concluded Meyers Research principal Mollie Carmichael. “Think about how you can leverage your previous buyers to help develop your brand and sell your homes,” she said.