The housing market heated up after the Fed turned dovish in 2019, and in 2020 the momentum is poised to continue, according to analysts. Among the key housing market predictions for 2020: While house prices are expected to flatten, a mixture of economic growth, high employment and low interest rates should drive demand. Housing stocks that have pivoted to entry-level homes amid continuing rising demand from millennials are expected to do well.
Housing Market Trends In 2020
CFRA Research’s Global Director of Industry and Equity Research Ken Leon sees momentum heading into 2020 for the housing market. The strong economy is one reason why demand will be strong.
“The foundation for a strong housing market is driven by employment growth, higher household income, and high consumer confidence levels,” he told IBD. “We’re also seeing the secular change to millennial households beginning to acquire their first homes.”
Leon said that stocks of housing companies that moved quickly to shift from building more expensive move-up properties to entry-level homes are benefiting from that secular trend.
But the analyst said another key driver comes from baby boomers who are near retirement.
“They’re downsizing but not just to active adult communities, but also to smaller homes,” he said. “What is called a move-down choice. That is actually creating additional demand for new housing.”
Mixed Housing Market Picture For Buyers
Realtor.com senior economist George Ratiu believes buying a home in 2020 will be a “mixed bag” for consumers.
“It will offer more opportunities for some as the supply of new homes begins to offset inventory pressure that has built over the last four years, interest rates remain reasonable and home prices flatten,” he said. “The broad price moderation will continue to make midsize markets in the Midwest and South attractive.”
Ratiu does not think enough homes are being built to address the rapidly growing demand from millennials for entry-level housing.
“The construction of new homes in 2019 was largely isolated to upper-tier of housing, and that is unlikely to ease conditions for first-time homebuyers,” the economist said.
Nevertheless, he does think that qualifying for a mortgage could be easier on paper due to stabilizing prices and a relatively low-rate environment.
And CFRA’s Leon does not believe the Federal Reserve will be stepping in to raise rates any time soon, a move that would slow down the market.
“The Fed’s likely to be on the sidelines until there’s more data indicating either an economy that’s heating up or an economy weakening,” he said, adding “it looks like they’ll be on the sidelines possibly for six to 12 months.”
Should You Buy A Home In 2020?
Buying a home is one of the most important financial decisions a person will make. Deciding to buy a home comes down to individual circumstances. Are you starting a family? Do you have a steady job with prospects for advancement? The advice of an independent financial advisor can be helpful.
A key rule of thumb is to keep your debt-to-income ratio as low as possible. Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. To get a qualified mortgage, the Consumer Financial Protection Bureau recommends a total debt-to-income ratio below 43%.
Another question to ask: Does it make more sense to rent or buy a home in 2020? A key metric to watch is the price-to-rent ratio, which is the ratio of median home prices to annualized median rent in a given location. As a general rule, ratios ranging from 1 to 15 are low, meaning it’s typically better to buy. Ratios from 16 to 20 are moderate, meaning the advantages of buying are less clear. And ratios of 21 and higher mean it is much better to rent.
San Francisco has the highest ratio in the U.S. at 50.11, according to analysis of Census data by Smart Asset. Los Angeles comes in at 38.59, New York at 36.83, and Seattle at 36.07. Houston has a more affordable ratio of 14.67, while the cheapest are Cleveland at 8.31 and Detroit at 5.35.
A recent trend has been millennials moving out of city apartments to buy homes in the distant suburbs or cheaper parts of the country.
Also on the checklist for buying a home: having enough money for a deposit, getting preapproved for a loan, and checking your credit score. Make sure that any potential home to buy is somewhere you are willing to live for the long term. If you have or plan to start a family, consider the quality of local schools.
Also, hire a trusted real estate agent. Real estate agents can help you find a home to buy and negotiate the price. But remember, it’s ultimately your decision.
Should You Sell A Home In 2020?
If your home no longer matches your lifestyle, perhaps due to family changes or employment prospects, you may be ready to sell your home in 2020.
Forget about national housing market trends. If you’re thinking about selling a home, you want to know if there’s buying demand in your area. That’ll determine how much you can reasonably expect to sell your home for. Keep in mind that you likely will have to pay a real estate commission of around 6% of the sale price. Buyers also may ask for the seller to cover their closing costs.
Also, if you sell a home, don’t forget to think about your next one. If you’re upsizing to a bigger home, make sure you have enough equity in your current property to afford it.
Sellers should also complete any half-finished remodeling or repairs.
The amount of demand for your home will depend on where it is located, and what type of property you own. According to Realtor.com’s Ratiu, sellers will have to deal with “dormant price growth and slowing activity,” which means they may have to be more patient and thoughtful about pricing.
“Entry-level home sellers can expect steady competition for their homes, which will keep prices firm. Upper-tier housing is expected to be softer as properties will likely sit on the market longer, requiring greater incentives to close deals,” he said. “As the market moves toward a more balanced scenario, sellers who adjust to local market conditions can expect to benefit from continuing demand.”
Expert Advice For Homebuyers
If you do want to buy a house in 2020, it is important that you set a budget before property hunting. That sounds obvious, but not everyone does it, so it’s worth pointing out.
“It’s incredibly important to make sure that you’re taking on a payment that can be sustained over the long haul,” Mortgage Bankers Association Chief Economist Mike Fratantoni told IBD.
But that budget shouldn’t just include a down payment and money to cover mortgage payments, property taxes and expected upgrades. Make sure to have enough cash in reserve for large unexpected expenses. Examples include dealing with a broken-down furnace, a gutter that needs replacing or repairing broken-down appliances.
“Have that budget in place and make that determination of what you can afford before you go shopping for a home,” Fratantoni said. “The problems really come along when someone falls in love with a home and tries to figure out how they can finance it. It’s a much better move to understand your budget before you go shopping.”
Failure to understand what you can realistically afford in this housing market leads to problems down the line and can even end in foreclosure.
Housing Market Stocks To Watch
Wedbush Securities analyst Jay McCanless is bullish on homebuilder stocks going into 2020.
“We think investors who are already in the homebuilders should maintain their positions, and for some of these names that are outperform-rated for us that have had a pullback, whether its Century Communities (CCS) after their earnings report or Taylor Morrison (TMHC) when they declined on the announcement of the William Lyon Homes (WLH) (acquisition) deal, we feel those are good buying opportunities,” he told IBD.
McCanless believes that as long as mortgage rates remain in the high 3% to low 4% range, business will continue to flourish for homebuilder stocks.
“You look at the order reports from any of the builders over the last two quarters and we’re certainly seeing some very good demand,” he said.
McCanless currently has outperform ratings on Beazer Homes (BZH), Century Communities, Lennar (LEN), Taylor Morrison and William Lyon Homes.
And the analyst believes there could be plenty of merger activity on the horizon. He thinks almost every builder is a potential acquisition target, noting the importance of scale to compete against industry giants such as D.R. Horton (DHI) and Lennar.
CFRA’s Leon is also expecting housing stocks to shine in 2020. He rates Taylor Morrison a buy, and believes it will benefit from buying William Lyon because 85% of their deliveries and new homes are entry-level properties. He also likes MDC Holdings (MDC), which has been building entry-level communities organically, rather than through acquisition.
This Housing Market Stock Stands Out
MI Homes (MHO) tops the Building-Resident/Commercial Group with a Composite Rating of 94, putting it in the top 6% of stocks tracked. The stock is up 88% in 2019.
The firm builds and sells single-family homes and attached townhomes to first-time, millennial, move-up, empty nester and luxury buyers. One of its standout features is its Smart Series homes, which are aimed at entry-level and move-down buyers. Production is rising, and they accounted for 28% of sales in Q3.
The Stock Checkup Tool shows it has a healthy mixture of both technical and earnings performance. Earnings have grown by an average of 27% over the last three years, which is just above the 25% growth sought by the CAN SLIM cognoscente. More recently, growth has not been as impressive, with EPS swelling by an average of 9% over the past three quarters.
The stock has yet to form an actionable base after plunging through its 50-day moving average, but it may be one to consider adding to your watch list.
Source: Investor’s Business Daily
