2018 Market Outlook Real Estate 2018 Annual Market Update

    With 2017 over, and most people making plans for 2018, we wonder where the market is going and how it will affect us in the years to come. Will the market continue to favor sellers? Will we begin to see a more balanced market as we progress into a new year? What about interest rates? This market outlook will prepare you for what to expect in the upcoming 2018 real estate market.

    Interest Rates

    The NAR predicts the Federal Funds Rate to reach 1.8% in 2018, and continue to increase to 2.4% in 2019. By 2020, the Federal Reserve is expected to raise the rate to 3%. In 2017 this rate was 1.0%– up 0.6% from 2016’s rate of 0.4%.

    As the Federal Funds Rate continues to increase, so will mortgage rates this upcoming year. Freddie Mac’s annual average 30-Yr Fixed-Rate during 2017 was 3.99%, while in 2016 this average was 3.65%. As of January 2018, the rate was 4.15%. Robert Johnson, president and CEO of The American College of Financial Services, states that we should expect rates to increase a notch or two over the course of 2018, as the Federal Reserve pursues a more restrictive monetary policy. By June 2018, the rate is predicted to be at least 50 basis points higher than it is right now, and in general, rates will range between 4 and 4.25%, though we may see rates as high as the mid-five range by the end of 2018.

    Why do rates increase? Dr. Rossi, professor of finance at the University of Maryland, states that reasons for a hike in rates could be attributed to a number of possible scenarios, including the Treasury Note curve, a change in GDP, midterm election results, tax reform legislation, or even unseen world events, such as a major terrorist attack. Not to worry though, the current average 30-Yr Fixed-Rate is 4.08%, which is still lower than the high of 4.17% we saw in February of 2017.

    Housing Shortage

    One of the biggest challenges facing prospective homebuyers is our nation’s housing shortage. Our market has favored sellers in recent years, making it all the more difficult for buyers, both experienced and new, to find a home that fits both their needs and their budget. Despite the tough market, in both 2016 and 2017, we saw Generation Y/Millennials (ages 36 and younger) representing the largest percentage of homebuyers— 35% and 34%, respectively. Of these buyers, 66% were also first-time buyers. The Professional Warranty Service Corporation predicts that Millennials will represent a whopping 45% of all home loans taken out in 2018, despite high student loan debt and rising home prices being obstacles in their road to homeownership.

    For 2017, the NAR reported 5.54 million home sales, which consisted of both single-family homes and condo/coops. By the end of 2018, this number is predicted is fall to 5.52 million homes, and by the end of 2019, it is predicted to rise to 5.71 million homes as the market starts to become more balanced. For the entirety of 2017, a reported 9.8 million new single family-homes sold— down from the 12 million that sold in 2016. In 2018, 13.6 million new single-family homes are expected to sell, and by 2019, only 7.1 million.

    NAR Chief Economist Lawrence Yun states that existing-home sales in 2018 will increase 3.7% to 5.67 million homes, while the national median existing-home price is expected rise by about 5.5%. Despite rising home prices, President Trump’s tax reform plans, and an overall lack of inventory, 2018 is on track to being a better year than 2017 in terms of home sales, due to improving wages, more job creation, and our continually improving economy.

    How Will This Affect Us Locally?

    With our explosive growth in Bozeman and the surrounding areas, we have been following this national trend of low inventory and rising prices. Months of supply, or absorption rate, acts as an indicator of buyer demand versus housing inventory. Less than 6 months of supply is considered a seller’s market, while greater than 6 months of supply is considered a buyer’s market.

    The months of supply for single-family homes in Bozeman and Belgrade has steadily declined over the past 5 years. At the beginning of 2012, the months of supply for Bozeman city limits was 7.4, while in Belgrade the months of supply was 6.8. By December of 2017, the months of supply for Bozeman had dropped to 2.4, while in Belgrade it had dropped to 1.8. This indicates that the number of buyers in our area are significantly outweighing the number of sellers and new homes built.

    The annual average months of supply for single-family homes in the Bozeman area and Belgrade from 2012 to 2017 are shown below:

    With demand exceeding supply, we can expect median sales prices to rise as we move into 2018. The median sale price for single-family homes has been on the rise since 2012, with a few small decreases in price here and there over the course of the past 5 years. While the predicted increases in mortgage rates will likely impact price appreciation, we project a continued trend of rising prices and relatively low inventory in our local area.

    The annual median sales price of residential single-family homes in the Bozeman area and Belgrade from 2012 to 2017 are shown below:

    Although both mortgage rates and prices are expected to increase, 2018 should still be a great year for potential buyers as new inventory is introduced to the market, although it would be wise to purchase sooner rather than later before rates continue to increase. If you have owned your home in this area for several years or more, especially if you purchased during the market lows of 2011 and 2012, it is likely that you already made a significant return on investment.

    By keeping up-to-date with market trends and economic conditions, both buyers and sellers can prepare themselves for the 2018 housing market in order to make the best economic and personal decisions for them and their families.