Expected Housing Trends in 2020

Is 2020 a good time to buy a home, sell a home, move up, or invest in real estate — or will you be better off parking your money elsewhere, whether that means buying a house in a different location or an investment in an entirely different industry? While no one knows exactly what will happen with home prices in 2020, if you have the right sources and know where to look, there is enough evidence to make a sound educated guess. Where will we see softening housing trends first, and which cities are still showing healthy growth? We examined all 381 metropolitan statistical areas (MSAs) in the US for local affordability (and change in affordability), housing market price growth, and the pace of housing market price growth to pinpoint where the housing market is slowing down.


The Best and Worst Housing Markets: Affordability and Market Growth

While we are still seeing a positive housing trends in growth on average, the explosive acceleration we’ve seen over the past few years is clearly softening, market by market. US housing markets that have been headlining the recent growth cycle are decelerating dramatically, bringing their growth more closely inline with historically stable MSAs. Of the 25 housing markets that show the most marked growth deceleration, 10 are in Florida — and the list includes presumed stars like San Francisco, San Jose, Portland real estate market, and even Denver real estate market.

The accelerating markets are few, and they tend to be smaller, historically affordable areas where the pace of market growth has been slower. And, in between, we find the middle range of comparatively stable MSAs, generally marked by challenging job markets and static local economies.

Some notable surprises are the New York metro area, which continues to accelerate (albeit by 0.09 percentage points), and the Seattle real estate market, whose growth we expect to decelerate by 2 percentage points to 12% this year. What’s causing slowing growth in the housing market? There are dozens of factors in play, but the ones that with the biggest impact during the next few months include:

  • An affordability crisis in many rapidly appreciating markets
  • Waning home sales volume and prices in specific price segments
  • A likely increase to mortgage rates
  • Impact of the 2018 tax law on real estate
  • General uncertainty about the future

Luxury Real Estate Trends 2019

Finally, our analysis within individual metros found more pronounced softening in the luxury segment in several markets, typical of mid-to-late cycle behavior where exceedingly high prices in most desirable areas drive buyers further out in search of relative affordability. Few regions are immune, with luxury softening everywhere from Dallas, Fort Worth, and Chicago to Atlanta, Las Vegas, and Florida markets like the Miami housing market and Tampa housing market.

In Atlanta’s high-end Buckhead neighborhood, we can see the effects of this “luxury lag.” Although the price per square foot in Buckhead is still among the highest in the Atlanta metro area, its price growth is at the low end of the spectrum.

5 Housing Trends That Will Change The Market In 2020

1. Affording the roof over your head

The real estate industry is facing a basic economic problem: lots of people want to buy homes but can’t realistically afford to do so in their current geographic area. This is because affordability, which describes the percentage of median household income spent on the median household mortgage in the geographic area, has become an increasingly acute issue over the past decade. Most financial experts suggest that households spend no more than 30% of income on housing, and many metro areas exceed that amount. Home prices, mortgage rates, household income, and local property taxes are all important factors in determining how affordable a certain MSA might (or might not) be.

Graphs charting the housing market have looked like a roller-coaster over the past decade: up and down, and now climbing back up again. But many markets haven’t been stable or steady, and that not only contributes to uncertainty — it also makes potential first-time home buyers less courageous about taking the plunge into home-ownership, lest anyone forgot the recent history of what can happen to a red-hot housing market.

Buyers who are ready to take the plunge are competing very vigorously for a limited supply of homes for sale, which adds volatility to the market and can keep home prices high or cause them to rise, à la 2004, in areas where homes for sale are particularly scarce (San Francisco, Seattle, and Denver are all good examples).

In some of those areas, the problem has become so acute that residents are spending more than 30% of their household income on housing. Thirteen of the top 100 MSAs passed that critical (and worrisome) barrier in 2018. In total, 30 of the top 100 are above 30% — 5 are above 50%, and there are some neighborhoods within these metros that top 70%.

So what does that mean for buyers? Not everyone is a millionaire, and many potential entry-level home buyers are also dealing with student debt and relatively low wages. There’s a segment of the market that may become long-term renters out of necessity rather than choice, if housing affordability continues to spiral beyond the reach of the average wage-earner.

2. Where will home sales and prices go in 2020?

The rate of home sales has been gradually making its way up from the depths of the recessionary lows, but remain relatively low compared to household growth. For example, current existing home sales are near 2003 levels, but household growth has increased 13.5% during that 14-year duration. Put it all together, and there’s pretty much only one way for the number of sales to go, and that’s up. Buoyed by an increasing number of new construction inventory coming online, we expect more buyers in the market for a home in 2020 as well, whether as owner-occupiers or investors.

In 2019, 10 of the top 100 MSAs saw prices soften (growth was at least 1% slower than the annual growth over the past three years), and growth is expected to slow (or continue to slow) in another 41 of the top 100 MSAs in 2020.

Prices, however, are more diversified by locality. It’s true that collectively, overall home prices have gone up in the past few years, but the reality is that the housing market is much more granular than one national number can represent. Historically, when the economy was stable, most major markets moved up in unison — but when there’s economic volatility like we’ve seen, then micro-neighborhoods within the same city or town might start to increase or decrease in price seemingly independent of each other.

We can expect to see much more of this hyper-localized fluctuation within markets in 2019. Home prices and sales trends are going to be more nuanced at a ZIP code, neighborhood, and even block level as opposed to broad swaths of movement for a state or a market, and anyone parking money in real estate is going to want to understand why homes on one city block are fetching more money than homes on a neighboring street.

3. Mortgage rates: Only way to go is up in 2020

Mortgage rates fluctuate up and down, more or less following the influence of the overnight exchange rate at which banks trade money. That rate is set by the Federal Reserve, and with near-historic lows and relatively low inflation, the Fed has made it clear that it intends to raise the rate in 2019.

By this time next year, we may see mortgage rates as high as 5%, but is likely to end up nearer current rates at 4.75%. As rates go up, current homeowners who carry lower mortgage rates might be dis-incentivized to sell because both mortgage rate growth and home price growth will potentially price them out of buying back their own home from themselves, let alone secure a loan for a larger home.

That said, there certainly is a large pool of current and potential home buyers who remember when mortgage rates pushed higher than 6%, and they are less likely to be deterred by the higher mortgage rates we’ll see in 2019.

4. The tax man cometh

Individual taxes are so complicated that many of us rely on accountants or software to wrangle them. Add in significant changes to the status quo, and it’s no surprise why there has been a race to understand the effects of the new tax plan. Each filer’s unique circumstances, however, will ultimately dictate how the new tax law affects them, so it is tricky to make any blanket statements one way or the other on its overall effects on the economy.

That said, the two main changes of reduced mortgage interest deduction caps and the cap on the state and local tax deduction point to ‘zones’ of possible impacts. We buy houses Ocoee.

Clearly, the most vulnerable position is likely to be for owners of high-end homes carrying mortgages between $750,000 and $1 million, which are also the same class of filers most likely to itemize and take advantage of the SALT deductions. Those homeowners won’t be able to deduct as much mortgage interest and property tax as they did before the tax law.

In most markets, that range represents the upper end of the housing stock — luxury homes. But in markets like San Francisco, Los Angeles, or New York, homes between $750,000 and $1 million might represent starter or mid-level homes, not the luxury segment.

This is especially significant given that we’ve already observed the $1-million-plus segment of the housing market softening in several neighborhoods around the country.

We will have to see how the high-end market reacts in the upcoming buying season, but given the already waning demand in these markets, it’s hard to see how the new tax changes help this segment.

One other potentially big effect of the law is on the psyche of the consumer. Fannie Mae’s 2017 year-end Home Purchase Sentiment Index showed that consumers are already pulling back from the confidence they had in the earlier part of the year. Throw in a new law that directly affects mortgage interest and property tax deductions, and it adds yet another element of uncertainty in an already uncertain market, all of which could result in consumers deciding to wait and see.

5. When nobody knows

The housing market is just one part, albeit a large part, of a vast economy in the United States — so it’s going to experience ripple effects in 2020 from changes in other parts of the economy and social structure, such as employment, education, transportation and infrastructure, credit, politics, consumer sentiment, and many other components.

There’s one factor, however, that all parts of the market need to thrive and work well together, and that’s predictability: the security that you know what to expect with a reasonable degree of confidence tomorrow, next week, next month, and next year.

When it’s difficult to predict what to expect tomorrow (or next year), consumers have trepidation to take on major financial commitments, loaning money becomes riskier for the lender, and generally there is an overall “wait and see” strategy for signals on future movement — all of which result in challenges for the housing industry. Although the overall economy in the U.S. is robust, uncertainty is rampant; there’s quite a bit of unpredictability surrounding inflation, future economic policy, economic growth, jobs and wages, and other areas.

We humans will always need shelter — a place to live — but as we discovered in 2009, that doesn’t make real estate recession-proof. An uncertain economy is going to influence who gets a loan to buy a home and at what rate, and that’s going to influence existing affordability and housing equality issues in turn. As a result, it’s going to become a necessity for consumers and investors alike to know as much as they can about any home they’re considering for purchase and whether that home is likely to retain its value in the future.

Building Wealth In Real Estate

Archimedes made the comment, “Give me a lever long enough and a fulcrum strong enough, and I can move the world.”

“Leverage real estate to buy more properties. Invest in real estate with leverage.” You’ve probably heard the phrase many times. Yet it is difficult to get a clear answer as to what it means. All the while, you’ll be told that learning how to do this requires paying for their book or seminar. We’re going to break the mold and tell you what leverage is before explaining how to leverage real estate to build wealth. Leverage is a method that allows you to control properties with little cash.


What Does Leverage Mean in Real Estate?

Leverage in real estate means buying property with debt instead of paying cash. The classic case would be putting 10% down on ten houses and having ten mortgages for the remaining 90% on each property instead of paying 100% for one house. They call it using other people’s money to buy real estate. However, it can be your money that is leveraged, such as when you borrow money from sources you control to put down the down payment on rental properties. Cash for houses Grand Prairie.

Using Leverage in Real Estate to Buy More Properties

Below are examples of leverage connected with compounding. We take a $100,000 property and assume a 6.0% inflation rate. The return of initial cash is expressed as a percent of the amount borrowed.

To take advantage of this leverage, you do not have to have a high income or assets. You just need enough credit and the ability to correctly evaluate risks.

The economist David Baxter sets out a distinct advantage of investment real estate:

“Monopolistic or oligopolistic power does not exist within real property markets. Property ownership and especially home ownership is widely distributed. So is the demand for ownership. While much has been made of the concentration of the developable land, and the supposed monopoly profits it entails, new building accounts for less than 3% of the total.”

For real estate, the small investor is on even footing with the larger investors. Real estate wealth based on capital appreciation is likely to continue because investors are allowed to use and profit from the continuing availability of leverage.

Let’s look at a real estate investment with only a 2.5% rate of inflation compounded yearly. We will see that it is still a good investment when used with leverage.

Some of North America’s greatest fortunes have been built from real estate. Properly selected, real estate is one of the safest investments you can make. It is the single biggest investment for most people.

How to Use Leverage in Real Estate?

The most common method for using leverage in real estate is to tap into financial resources you control to put the down payment down on rental properties. For most of us, this is our primary residence. Can you use your home equity to buy a rental property? The answer is yes, but indirectly. Your lender will let you cash out your home equity to renovate your existing home, pay down debt, invest in the stock market or use for some other purpose.

Most lenders won’t let you take out a mortgage on the current home to explicitly buy another property. Instead, you take out a mortgage on your current home, put part or all of that money down on rental property, and have a separate mortgage on the rental property for the remaining balance.

Why Aren’t More People Leveraging Real Estate to Build Wealth?

The first hurdle that they face is equity requirements. A general rule is that you can’t cash out more than 80% of the equity in your home. Note that this includes any outstanding loan balance you have on your home. If you have a $200,000 home, must have at least $40,000 of equity in the property. If you have a $100,000 left on the mortgage, the lender will only let you borrow up to $60,000.

That’s $200,000 minus the $40,000 equity requirement minus the $100,000 outstanding mortgage balance. And they’ll factor in the balance of any HELOCs and second balances into this equation, as well. If you don’t have enough equity in your home, leveraging real estate like this isn’t an option.

Build Wealth One House at a Time

If the home is paid off, leveraging real estate to build wealth starts by taking out a mortgage for up to $160,000 on your primary residence. Then that money would be put down on one or more rental properties. If you put $40,000 down on each rental property worth as much as your current home, you would be able to buy up to four homes to rent out. Know that you’d need to pay realtor fees, legal fees and repairs to the properties.

Realistically, you could buy three properties easily. When leveraging real estate, you need to be certain to rent the properties out for enough to pay the mortgage, taxes, insurance and money toward your own mortgage payments as well.

Other Ways of Using Leverage in Real Estate

Leverage real estate can be bought through other means. In theory, you can borrow against your 401K to raise a down payment on a rental property. You’ll have to pay interest on this loan, and if you lose your job, the entire loan is due immediately or else you have to pay taxes and the early withdrawal penalty on the outstanding balance.

If you’re going to leverage real estate using your 401K, we suggest only borrowing enough to make a down payment on a single rental property. Then the loan balance is enough that you could raise the money through other channels if you had to pay it back all at once. The primary mortgage for the rental properties, though, would be secured by the rental properties themselves.

It is in theory possible to leverage real estate using money from credit cards, but this isn’t advisable. You’re paying an insane 10 to 20 percent interest rate on property that will at most yield a 10% ROI. And that’s aside from the risk that comes from being in debt up to your eyeballs.

It is possible to leverage real estate by taking out hard money loans and other expensive, short term loans to raise the money needed to put a down payment on a rental property or fix-and-flip. This is a dangerous method of leveraging real estate to build wealth unless you’re a professional building contractor. In general, the average person shouldn’t be trying to buy fixer-uppers, attempting to manage repairs, and then hope they can sell the property for a profit.

It makes for entertaining reality television shows, but in reality, a lot of the properties don’t sell for enough to be worth the effort. Even professional building contractors have to be careful not to end up “owning their jobs”, earning as much from a series of flipped fixer-uppers as they would from a job.

Inflation Can Help Real Estate Appreciate

The federal government is running on an annual deficit. The government has no politically acceptable alternatives other than to “print” new currency into existence. While that happens inflation will creep into the general economy in the form of price inflation. And one day, maybe in the not too distant future, we may likely see a rapid flare up with hyperinflation.

As long as the dollar’s value continues to go down, people will continue to resort to real estate as a hedge against inflation. Moreover, this will contribute significantly to the future demand for real estate. Thus creating an increase in real estate property values.

Risks to Avoid When Using Leverage in Real Estate

What is the downside of using leverage in real estate? Leveraging real estate to build wealth sounds perfect, but it comes with risks. And it is the risks of leveraging real estate that cause the horror stories that scare many from trying. What are the risks you need to avoid when leveraging real estate? And what can you do to minimize the damage when these things happen?

The greatest risk of leveraging real estate is that you may end up losing everything, including your own home, if you make a mistake. The best risk mitigation technique is to make sure you can pay your own mortgage if the renters fail to pay. It may be stressful to pay your primary mortgage and the mortgage you took out to buy investment properties. However, if you can pay that bill even if the property is empty or the renters aren’t paying, you won’t lose your home.

You can minimize the financial stress when leveraging real estate to build wealth by being financially conservative. Don’t borrow as much as you can afford to borrow, and snap up as many properties as possible. Buy one or two properties that are well within your budget, being careful not to overpay on the properties or buy houses that need massive work.

Give yourself plenty of margin when estimating property taxes, insurance and other carrying costs. Don’t make financial decisions assuming a best case scenario, such as thinking you can sell the house for 50% more or rent it out for $2000 a month when the average rent for the area is $1500.

It is said that you make the money on the buy, especially for fix-and-flip but also in property you’ll hold onto for the long term. However, this doesn’t mean you should buy any cheap “deal” that comes along. Do your due diligence. Have every property thoroughly inspected, so that you don’t pay $100,000 for property that needs $30,000 more in repairs than you thought it did. If it needs specific repairs to be habitable, ensure that the property is sufficiently discounted.

You’ll lose money if you overpay on repairs and upgrades to a property. Get multiple estimates on the cost and scope of repairs, because overpaying for repairs and upgrades is a waste of money you cannot recoup. Get the properties up to neighborhood standards while skipping the temptation to add granite countertops and make the rental look like a model home.

No one will pay a premium to live in a fancy house in a working class neighborhood. What happens if you end up with a basic rental property? You have tenants who will pay the going rate, and you can plan on upgrading the property after they move out.

A common mistake when leveraging real estate to build wealth is focusing on the house and not the cash flow. The goal of rental real estate is to get paying renters into the property as quickly as possible. Then start collecting rent. You cannot take the risk of getting bad tenants who don’t pay the rent or may even trash the place. Vet tenants based on their ability to pay the rent and their payment history in the past.

If they have criminal histories or tons of drama, don’t rent to them. You can’t afford to evict them later, much less after they’ve failed to pay rent for four months. Don’t forget to comparison shop for property insurance, property managers and anything else you’ll have to pay on a regular basis. These costs will only multiply as you add to your real estate portfolio.

Another mistake in leveraging real estate is rushing to go buy the next property. Take your time paying down the mortgage on the rental properties and your own mortgage. Build the equity back up in all of the properties. This will make you look better to potential lenders in the future instead of literally mortgaging yourself to the hilt. You’ll be certain not to lose money if you have to sell a property for any reason.

You can reduce the risk when you leverage real estate by having a large emergency fund. We’re talking about tens of thousands of dollars of cash set aside, not a line of credit. This money allows you to pay for the surprise bill to replace a dead air conditioner at the rental house without taking out another home equity loan, or worse, charging it on a credit card.

Don’t make the mistake of assuming appreciation will save you when it comes to real estate investing. Never go into the financial hole on the mere hope the property will be worth 10% next year.

Should You Use Leverage in Real Estate? The Conclusion

It is possible to earn significant profits or steady cash flow when you leverage real estate. However, there is risk involved with such projects beyond going into debt. Take care with every decision along the way and walk away from deals that don’t have enough margin, because you don’t want to go bankrupt or lose everything in what seemed like a way to get rich quick with other people’s money. That said, leveraging real estate to build wealth is a legitimate way of generating steady cash flow if you’re conservative on everything from financial projections to your debt load.