As we prepare for the upcoming listing season, we’re often asked what we expect the Asheville real estate market to do in 2020. We’re well into the 9th year of a real estate bull market in the Asheville area, and that has many people wondering if the market will soon enter a downturn. In this post, we’ll look at 5 reasons the Asheville market could soften in 2020, and also 5 reasons the market could remain strong.
5 Reasons the Asheville Market will Soften
Asheville Real Estate Prices are at an All-Time High
So we’re well into the bull market, and home prices are soaring. During the Great Recession, the lowest level for average sale price in Asheville was $249,000 in December 2011. Since then, buyers have gradually re-entered the market, driving prices back to pre-recession highs and beyond. Some people that feel that these prices are too high and are due for a correction.
It’s an Election Year
Election years, especially presidential election years, almost always give people pause when it comes to large purchases. We’ll still see our typical market traffic during the spring and summer selling season, but there will likely be a lull in the fall as the election nears. I’ve been a Realtor since 2006, and this has happened in every previous presidential election year. But the 2020 election could provide another twist; with the significant differences in economic policy between the remaining Democrat candidates, it’s even possible that we could see a temporary slowdown as we approach the Democratic National Convention in July.
But even with some buyers pausing their real estate plans, they do typically re-enter the market after either A) their candidate wins the election or B) their candidate loses the election and they realize the world has not come to an end.
The Stock Market is at a Record High
Any time the stock market is at new highs, there are many people that believe it will experience a downturn. They use the term “correction,” because that makes it sound like the current market levels are artificially high. Perhaps they are right, but I’m not smart enough to predict what will happen with the stock market.
But it is safe to say that the high stock market has certainly been one reason for the increase in real estate values over the last few years. People that have well-performing investments and retirement accounts to liquidate can purchase more real estate. If the stock market softens, then obviously this changes their ability to buy houses and could contribute to a softening of the real estate market.
Listing Inventory Could Increase
With inventory so limited and prices so high, it seems logical that many homeowners would realize now is a great time to sell. That is certainly true, and we expect to see a lot of new homes hit the market in the next 2-4 months. However, there is a lot of pent-up demand for existing homes, and that demand needs to be satisfied before we see supply finally begin to outpace demand. But if enough sellers decide to take advantage of current real estate prices, we could see a softening in the market.
Mortgage Interest Rates Could Increase
We’ve been hearing for several years now that mortgage rates should begin to rise. As I write this, 30-year mortgage rates are around 3.5%, which is very close to the record low rates seen in 2012. If rates do rise, even slightly, it can significantly affect the price of the home that a buyer can afford. As shown below, a buyer that can afford a payment of $1400/month (not including taxes and interest), can afford a $390,000 house with a 3.5% 30-year mortgage. If rates go up to 4.0%, that same buyer can now only afford a $367,000 house.
5 Reasons the Market will Remain Strong
So we’ve discussed a few theories about why the market could pull back in 2020. But there are just as many reasons why it might not. It’s entirely possible that we could see the market continue to strengthen.
Inventory is at Historic Lows
At its core, the real estate market is entirely dependent on supply and demand. When you have historically low inventory and a lot of demand, basic economic principles say that prices have to increase. Below is a graph showing the levels of inventory in Asheville, Black Mountain, and Buncombe County. We know that inventory will increase in the next few months, but will it increase enough to meet current demand?
Only Qualified Borrowers are Getting Mortgages
The last major housing decline was primarily caused by horrendous lending practices in the American mortgage industry. But anyone who has gotten a mortgage in the last 10 years can tell you how much paperwork and verification of employment/income is now involved to prevent such a collapse from occurring again. You can’t just walk into a bank and get a “stated income” loan like you could during the bubble. Your lender will verify everything. This means that only credit-worthy borrowers are getting financing. You can still buy a home with very little or no down payment under certain lending programs, and we still see some Asheville area buyers doing this (mostly first-time homebuyers), but these buyers have a proven credit history and reliable income.
In other words, people are buying homes they can actually afford. Buyers are looking at the cost of ownership, and usually not borrowing the maximum amount they can borrow with the expectation of selling the home in just a couple of years to turn a profit due only to market appreciation.
Primary and Second Homes can Generate Cash-Flow
Before the Great Recession, a lot of people bought second homes in the Asheville area, and in many cases the homes sat vacant except for a few weeks of the year. The logic was that the house was steadily appreciating anyway, so there was little risk to buying a home that was generating expenses but no revenue.
Since the bubble burst, we’ve seen a huge increase in the number of people looking to buy a home that they can also use to generate income. Buyers are still buying second homes, but they are frequently using vacation rental management companies, AirBnb, or VRBO to manage them while they aren’t using the homes.
Many homeowners have even invested money into their primary residence to help generate income. This could be something like finishing out a basement into an apartment or adding a detached garage with a studio apartment above it. All of these things increase the value of the home and make it easier for the homeowner to afford the mortgage payment.
Mortgage Rates are Still Very Low
As mentioned before, mortgage rates are still at or near historic lows. While they could increase, for now they are very attractive. Lower interest rates will keep buyers in the market until home prices alone (and not interest rates) make homes too expensive to be affordable. It’s also worth noting that simply the perception that interest rates could increase, such as when the fed indicates they may go that direction, often makes buyers hurry to buy homes before rates go up.
Real Estate Has Historically Appreciated
If you look at how real estate has performed over the last 50 years, you can see that it has been a very reliable investment.
Below is a chart of historical home prices in the United States. There have been some minor declines in home prices over the years, but the only major decline of the last 50 years was during the Great Recession.
With 20/20 hindsight, it’s easy to see the factors that lead to the collapse of the housing bubble that led to the Great Recession. The simple fact is that many buyers should never have been able to buy the homes they were buying. The mortgage industry was either under-regulated or incorrectly regulated, and there was rampant fraud. There was artificial demand for real estate.
The Dodd-Frank Act of 2010 has implemented many checks in the mortgage industry to help protect borrowers from abusive lending practices. This also means that borrowers must legitimately document their income and credit history. This leads to legitimate loans that should be repaid as long as borrowers remain employed.
However, this doesn’t mean that real estate is protected from a correction of some sort. It certainly appears that if a real estate downtown does happen, it will be due to something that happens outside of the housing industry. This could be a correction in the stock market or some other economic downturn. Very extreme or unforeseen events, such as war or a terror attack, could always cause an economic decline. So if the national real estate market softens, it would likely be from an outside factor that leads to an increase in the unemployment rate. But we don’t expect the mortgage industry to be the cause.
It’s encouraging that the demand we see in the market today is coming from buyers with good jobs, well-qualified (and often cash) investors, and second home buyers with the means to afford a vacation home and maybe even a plan to use it to generate income. All indicators point to continued strong demand in the first half of 2020, especially in the Western North Carolina region. We expect new listings to continue to sell quickly during the spring and early summer. It will be interesting to see if prices continue to increase as a result.
We hope this is a helpful analysis of where we think the market is headed in the next few months. If you have questions about the Asheville real estate market, please contact us. We look forward to helping you with your Asheville real estate dreams!