2018 Predictions: The Inventory Crisis Will Drive the Market

In most markets around the country, inventory of homes for sale has become so tight that housing is now a game of musical chairs: Nobody wants to stand up from the home they’re currently living in and list if for sale, for fear they won’t be able to find another home to buy. This inventory crisis leaves few options for millennials, a huge generation just entering the market that genuinely wants to become homeowners, but can’t find anything to buy.

These dynamics will lead to both predictable and creative responses from homeowners, buyers and builders in 2018:

• Inventory shortages will drive the housing market: Inventory will remain a major concern in 2018, continuing to play a significant role in pushing up prices. It will create particularly strong headwinds for first-time home buyers, who don’t have the benefit of profits from a prior home sale to boost their down payments and make them more competitive. There are 12 percent fewer homes to choose from nationwide than there were a year ago. And the homes that are available are not accessible across the market: As of September 2017, more than half (51 percent) of U.S. homes for sale were in the top one-third of home values – largely out of reach for typical younger, first-time, millennial buyers.
• Builders will turn their focus to entry-level homes: You can build your way out of an inventory crisis, but to date, the number of new homes built each year has remained well below historical norms – and it’s been concentrated in more profitable, higher price segments. In 2018, that dynamic will change for a simple reason: Builders cannot and will not ignore a hungry market. They’ll respond to the demand of more first-time buyers entering the market by increasing construction of new, entry-level homes.
• Millennials will move to the suburbs: Those more-accessible homes will come with a catch: They’ll likely be farther from urban job cores. Escalating land and construction costs – along with zoning laws – make it prohibitive for builders to add affordable housing in cities near jobs, so they will look to the suburbs. As a result, that’s where millennials and first-time home buyers will flock for the greater variety of homes at relatively lower prices.
• Many homeowners will remodel rather than sell: Still, inventory overall will remain very tight, and the musical chairs phenomenon won’t fade quickly. Wary of becoming buyers in such a limited market, many homeowners will choose to remodel their homes instead of moving – decisions that collectively may worsen the inventory crisis.
• Baby Boomers and millennials will drive home design: These newly constructed and renovated homes will feature livable, comfortable designs that appeal to both millennials and Baby Boomers. For example, they might boast wide hallways that can accommodate both strollers (for young families) and/or wheelchairs (for aging Boomers). Homes also will be built using frameworks that make it easy to add elements later, including extra support beams behind shower walls to which grab bars can be added as older generations age in place.
• Homes prices will continue to grow, but at a slower pace: In part because of the continuing inventory shortage, home prices are expected to climb 4.1 percent in 2018, according to more than 100 housing experts and economists surveyed in the latest Zillow Home Price Expectations survey. That is still fast compared to “normal” annual appreciation closer to 3 percent, but is slower than the current 6.9 percent annual pace of home value growth.