January 2018 marks an inflection point. We're two years into a strong recovery that started in 2016. But recovery becomes maturity, and maturity comes with different dynamics.
I'm forecasting a solid 2018, but not explosive like 2016-2017. Here's why.
The Maturation Signal
In my 40+ years, I've seen this pattern multiple times:
Year 1-2 of recovery: Explosive appreciation (8-12%+). Limited inventory. Bidding wars. Appraisals always positive.
Year 3-4 of maturity: Steady appreciation (4-6%). Modest inventory growth. Normal negotiations. Appraisals tightening.
We're entering Year 3. The characteristics are shifting.
Inventory: The Key Change
In 2017, we averaged 3-4 months of inventory (tight). In 2018, I'm predicting 4.5-5.5 months by fall.
That's movement toward balance, but still seller-favorable. However, it's enough to reduce seller dominance.
Why inventory is growing:
- Wealth from Appreciation: 2016-2017 appreciated homes mean owners now have buyup equity for upgrades. They're selling to move up.
- Rate Expectations: With rates potentially rising, some owners are selling before rates hit 5%. This is supply creation.
- Affordability Squeeze: First-time buyers hitting price ceilings. Fewer new buyers entering. Fewer people creating demand for older inventory.
Appreciation Moderating
My forecast: 4-6% appreciation in 2018, down from 7-9% in 2017.
Still positive, still meaningful. But not explosive. Here's the math:
2016: 7% appreciation 2017: 8% appreciation 2018E: 5% appreciation
That's a natural slowdown as markets mature.
Rate Hike Impact
The Fed has raised rates once (December 2017) and is expected to raise 2-3 more times in 2018.
Each rate increase reduces buyer purchasing power about 5-10% (for a given monthly payment).
Three 0.25% rate increases over 2018 would push rates from 4.0% toward 4.75%, reducing buying power and moderating demand.
Appraisal Implications
In 2018, I'm seeing:
- Comparable Data Abundance: More sales means better comparable selection. Appraisals are more defensible.
- Less Aggressive Appreciation: Values growing slower means fewer "surprise high" appraisals. Appraisals trend toward market reality.
- Greater Value Scrutiny: With inventory increasing, buyers become pickier. Appraisers need to be more critical of condition and deferred maintenance.
Market Segments Diverging
Not all property types appreciate equally:
Entry-Level ($300-500k): Still strong but competition cooling slightly.
Mid-Range ($500-800k): Still seller's market, good appreciation expected.
Luxury ($1M+): Selective demand. Appreciation variable.
Overpriced Properties: 2018 shows less tolerance for asking-price inflation. Homes priced above market take longer to sell.
Tax Reform Wild Card
Tax Cuts and Jobs Act took effect January 1, 2018. The impact remains unclear.
Reduced mortgage interest deduction caps ($1M to $750k proposed initially, currently being debated) could affect high-end market.
SALT deduction caps affect high-tax state buyers. California impact could be modest (appreciations slower in high-tax areas).
I'm watching 2018 closely for actual tax impact versus theoretical.
2018 Seasonal Patterns
Spring (Mar-May): Peak season, but with more inventory than 2017. Still strong market.
Summer (Jun-Aug): Slower season with more inventory. Prices soften modestly.
Fall (Sep-Nov): Continued moderation. More buyer leverage.
Holiday (Dec-Jan): Slow, but motivated sellers.
Specific Neighborhood Outlook
Orange County: 4-6% appreciation expected. Market shifting gradually toward balance.
Inland Empire (Riverside/San Bernardino): Slower appreciation (2-4%). Market expanding but softening.
Coastal: Stable appreciation (5-7%). View premium persisting.
Luxury ($2M+): Variable, dependent on individual property. Appraisals critical because comp selection is limited.
What This Means for Appraisers
2018 appraisals are increasingly important because:
- Markets are maturing, so value assessment is more nuanced
- Inventory increasing means more transactions requiring appraisals
- Comparable data is abundant, so appraisals need critical analysis
- Deferred maintenance becomes more important (buyers scrutinize more in slowing market)
I'm expecting a busier 2018, with appraisals requiring more detailed analysis and professional judgment.
For Market Participants
Sellers: Price realistically. 2018 doesn't reward overpricing. Market accepts fair-market pricing quickly.
Buyers: More negotiating power than 2017. Offer competitive but firm. Don't get pressured into bidding wars.
Appraisers: Standards remain USPAP, but market conditions mean greater emphasis on comparable selection and adjustment methodology.
The Broader View
2018 is a maturation year. Growth continues, but at sustainable pace. That's healthy for market stability.
Explosive appreciation (2016-2017) isn't sustainable. Steady growth (4-6%) is.
If you're in real estate for the long term, 2018 is a good time to be strategic and careful with pricing and purchasing.
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Planning a 2018 transaction? I can help you navigate a maturing market with realistic appraisals and market analysis. Contact me.