Continued inventory shortage to drive prices higher than expected

The housing supply shortage will continue into 2018 driving home prices higher next year than some market observers previously predicted.

Prices should increase by 4.1% in 2018, according to a survey of over 100 housing experts, market strategists and economists conducted for Zillow by Pulsenomics.

A year ago, these experts predicted home prices would rise 3.6% in 2017 and 3% in 2018. But prices increased in 2017 at a much higher rate because of the inventory shortage; the annualized rate of appreciation was 6.5% in October, Zillow previously reported.

The biggest surprise of 2017's housing market was the slow pace of new home construction, cited by 34% of the respondents. Only a few of those surveyed, just 16.7%, felt that would improve in 2018.

Housing market factors

Low mortgage rates was cited by 36.5% of the respondents as the market factor most likely to change in 2018, while 19.8% said it was solid home price growth. The lack of inventory was cited by 18.6% as a surprise factor for 2017.

Even as the supply/demand imbalance is expected to continue into next year, most of those surveyed said the rate of home price increases will continue to diminish over the next few years.

"Demand will continue to grow and, though supply should increase somewhat, we still won't build enough new homes to meet this demand, contributing to higher prices," said Aaron Terrazas, Zillow's senior economist. "Higher mortgage rates will eat into buyers' budgets, putting even more price pressure on the most affordable homes for sale. Unless there is a fundamental shift in the number and type of homes for sale, this is the new normal of the American housing market."

The median mortgage interest rate projection was 4.5% for 2018, with the low being 4.28% and the high was 4.7%.

"All but two of the 108 panelists who responded to this quarter's survey expect weaker home value growth next year relative to 2017, and panel-wide, returns are expected to average less than three percent per year after 2018," said Pulsenomics' founder Terry Loebs. "In a low-inflation environment, nominal housing gains in the 3% to 4% neighborhood will still create homeowner wealth at a pace exceeding the prebubble norm."

The most optimistic of those surveyed said prices will increase an average of 5% annually through 2022, while the most pessimistic predict an annual average increase of just 1.4%. "I don't foresee a stronger consensus emerging until we have greater clarity concerning tax reform and the pace of entry-level homebuilding," Loebs said.

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Home prices Housing markets Purchase Appraisals Real estate Homebuilders Zillow
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