One of the biggest markets in the U.S. is its real estate industry, which is why fluctuations in the prices of homes can have a spillover effect in other sectors as well. If you have followed the housing market over the past couple of years then you've seen numerous ups and downs, with real estate at its peak or people struggling to find affordable homes.
With the new year ahead of us, real estate experts have predicted big changes in the housing market -- both good and bad. If you are looking to invest in real estate in 2020, here's what you need to know.
Mortgage Rates Will Fall
Many real estate experts predict that mortgage rates will fall to a new low in 2020. As of December 2019, the mortgage rates were at 3.99 percent while the GDP of the economy and unemployment rates were looking good. However, given the political climate and progress on the trade deal, this will not last long.
In order to strengthen a slowly weakening economy, the Federal Reserve may cut interest rates in the short run to help increase spending. This may all lead to mortgage rates reaching an all-time low in 2020.
Homebuilders Will Focus On Starter Homes
Right after the Great Recession, investment in starter homes was not too high as real estate was only purchased by the upper and middle class. However, in the past few years, there has been a dramatic shift in this trend as more millennials are buying homes.
In fact, many young people want to buy homes again but there is not enough inventory to meet this demand. With a thriving economy and relatively low unemployment rates, there is expected to be a continued demand for starter homes in 2020.
Venture Capital Will Fund Real Estate
Numerous venture capital firms increased investment in both commercial and residential real estate in 2019. While there were some lows, like Soft Bank and WeWork, for the most part, this trend in real estate investment is expected to continue through 2020.
This trend is partly fueled by the impact of Artificial Intelligence (AI) on real estate through virtual tours and mobile buying platforms that will automate various aspects of buying real estate. AI companies like Knock and Opendoor are expected to increase venture capital investment in this sector.
There Will Be Greater Rent Control
Numerous bills on rent control were passed in 2019, such as capping rent hikes at 7 percent each year. When the announcement was made, there was a drop in multifamily housing unit sales as the trend has many investors worried.
Since real estate is such a huge industry in the U.S., the rent control issue is a hot topic at the 2020 elections. Rent control is expected to lead to a fall in real estate investments, as investors will not be able to recoup their costs or earn revenue without rent hikes.
Investment In Opportunity Zones Will Decrease
Real estate investors are always looking for a way to get tax breaks, so changes in laws relating to tax benefits could really swing the demand. If investors bought into an opportunity zone before December 31st, they could take advantage of a 15 percent cost-basis set up, if the holding period is more than seven years.
Given this deadline, investments in opportunity zones are expected to decrease in the next few months. While this seems bad, it also means that the valuation of the homes in these zones drops so with the cost-basis setup, it could result in larger returns over time.
The Private Sector Will Solve The Housing Crisis
It's no secret that there has been a need for more affordable housing in the real estate sector for many years now. This doesn't just apply to low-income earners but to blue-collar workers as well, many of whom want to buy homes.
While it is the duty of the public sector to solve this problem, the rent control cap will force the private sector to get involved in this housing crisis. Many private real estate companies are developing projects in Opportunity Zones, that convert existing homes into more affordable ones.
More Competition In Multifamily Housing Developments
Developers are always seen as the bad guys as they tear down single-family homes to build luxury condos but given the housing crisis, this is not always a bad thing. In some states like California, developers are looking to create multifamily homes with smaller luxury projects.
But in the end, one hopes that social responsibility and ethics will win as Opportunity Zones find ways to bring affordable housing to more affluent areas as well. In order for these companies to have a strong workforce, they also need to ensure that they have adequate housing.
Home Prices Are Rising Slowly
Home prices grew slowly in 2019 at 3.3 percent and this is expected to continue in 2020. The prices may increase slowly and there will be no unexpected price hikes. Many experts say that prices are only expected to rise by 2.8 percent in 2020.
For sellers, this price increase will mean a nice profit but there will also be a lot of competition in the market. It is also important to ensure that your home stands out from the others. For buyers, the high prices will mean they will need to increase savings and expand their search to states with more affordable real estate.
Low-Interest Mortgages Will Help Sellers
Since 2019, there has been a decline in mortgage rates and many experts believe this will continue in 2020 as well. Interest rates will be at 3.7 percent for a 30-year mortgage and 3.2 percent for a 15-year mortgage. However, this might change with developments in tariffs and trade wars.
For sellers, low-interest rates will mean that more people will be willing to buy your home. You can speak with a real estate agent to get an estimate for the value of your property. For buyers, it would be better to apply for a fixed mortgage plan so that you are aware of exactly how much you need to pay.
Retail Closures Will Affect Landlords
Nearly 9,000 retail stores were closed in 2019 and this number will only increase in the upcoming year. While there are still new brick and mortar stores opening up, there are not as many as the number of stores that are shutting down.
Stores like JC Penney and Sears have closed stores as online shopping has taken over in the last couple of years. Many formerly thriving brick and mortar stores have now been taken over by digital companies that need smaller spaces, around 2,000-3,000 square feet.
Increase In Real Estate Investments
With the economic decline over the last few years, there has been an increase in real estate investments across the U.S. Many domestic institutions injected capital into this sector to boost spending. This is one of the major reasons for the boost in investments in real estate.
Buying property has also become much easier as it has helped property owners improve their management capabilities. Logistics is the most common type of real estate investment as global industrial sales continue to rise.
Greater Need For Affordable Homes
Although many young people are buying homes these days, renting homes is still 59 percent higher than buying one. A major reason for this is because of the 80 percent displacement in wages as home prices only continue to rise.
As we enter the new year, there is a need for more affordable homes as many strong housing markets are plagued with high mortgage rates. States that have a population of over 1 million don't have enough affordable housing but this is expected to change in 2020.
A Move To Second-Tier Cities
Many first-tier cities are overpopulated with high real estate prices due to the high levels of investment. Hence, many developers are slowly making a shift to second-tier cities to take advantage of more space and lower costs. This will change the location of investments in the future.
This move has increased the value of real estate in second-tier cities and increased economic growth. Another reason for the shift to second-tier cities is to equalize the capitalization rates in both tiers.
While technology is nothing new in the real estate sector, we expect to see a dramatic shift in the amount of technology used over the next few years. Services like smart home applications and online selling platforms are expected to become even more popular.
AI and machine learning will also be used to manage properties and assist with urban planning. Numerous real estate developers are already using facility management solutions to manage and track their various properties.
More Luxury Home Listings
In 2020, real estate experts say we can expect to see an increase in the number of luxury properties on the market. This growth is driven by the high prices that sellers get for these homes. Large cities like Seattle and Nashville will spearhead this trend.
As per the rules of supply and demand, since there will be an increase in the number of luxury properties on the market, we can also expect to see a drop in their price levels. This is good for homebuyers who are hoping to buy luxury property this year.
Better Amenities To Attract Customers
The amenities offered by residential properties have always been a driving factor in increasing the value of the real estate. However, property developers are looking at amenities as more than just a swimming pool and a gym, which are now expected in most properties.
Real estate firms are looking to attract customers with more unique amenities like gardens and movie theatres. In addition to this, many luxury apartments and houses also come with smart home capabilities. Existing homeowners could also benefit from an increase in the value of their homes with these new amenities.
No Fear Of A Recession
In the past few years, many homebuyers have been hesitant to buy property due to fear of a recession. However, economic cycles are known to correct themselves and experts believe that the housing market will show an upward trend this year.
There have been warning signs in the economy, like the decrease in residential permits and lower sales. But unlike the Great Recession, there will not be a steep drop in real estate prices but rather a slow decrease. However, there are no dramatic shifts to worry about in the upcoming year.
Socially Responsible Investing
The millennial generation makes up a majority of homebuyers and they are factoring in social responsibility when making decisions on their purchases. They look at labels such as ESG, which stands for environmental, social and governance.
When it comes to real estate, properties need to be more focused on ESG rather than strictly on financial value. Making sure the property is sustainable and eco-friendly can result in a premium of 10 to 40 percent which is great for a developer's revenue.
It is the role of the government to develop the infrastructure in the country but as they don't have enough revenue to see this through, cities across the U.S. are taking matters into their own hands. Cities like Denver are using taxes to restructure their public transit system
This increase in infrastructure improves these cities' potential as places for real estate developments. An investment in the infrastructure of a city can make it an attractive place to live and also increases the quality of life.
Investment In Senior Housing
Statistics show that the life expectancy for baby boomers has been on the rise over the last several years. In the U.S., the number of people over the age of 80 is expected to double over the next two decades.
As this generation enters retirement age, a large number of senior citizens are looking for property. This includes upscale homes that allow them to lead an active lifestyle while enjoying a variety of amenities. We can therefore expect to see an increase in the development of retirement properties over the next few years.