Driven by record low inventory, surging home prices and historically low interest rates, the housing market kept getting hotter in 2017. Freddie Mac even proclaimed it “the best year in a decade” for U.S. housing. Now, despite significant constraints facing home buyers, the real estate outlook for 2018 is still rosy — which could spell opportunity for garden retailers that can adapt to the changing marketplace.

“In the housing market last year, we saw increases in the number of sales transactions, as well as the price of those transactions,” says Paul Bishop, vice president of research for the National Association of Realtors (NAR). “Home values have increased, giving additional equity to homeowners, and when homeowners feel wealthier, they’re likely to spend more. That plays out in substantial home remodeling, and it also shows up in retail categories like home furnishings, building materials, landscaping and garden centers.”

From August 2016 to August 2017, consumer spending at hardware and garden stores increased 12.8 percent, according to the Visa Retail Spending Monitor. What can garden retailers expect this year? Here’s a look at economists’ 2018 housing forecasts, with a breakdown of what it means for IGCs.

1. Inventory will still lag.

Paul Bishop

The biggest factor shaping the housing market this year will be the massive supply shortage that continues to hinder sales and hike up prices. There were 12 percent fewer homes on the market last September compared to one year earlier, according to Zillow, and more than half the homes listed for sale were priced in the top third of home values. Meanwhile, new home construction lags behind demand — particularly for starter homes, where inventory has not increased meaningfully since 2011.

Economists agree that inventory will remain a challenge in 2018, even as construction picks up. New housing starts were already up 13.7 percent by October, and Realtor.com anticipates inventory growth by fall.

2. Prices will keep rising.

As a result of a pinched housing supply, prices have soared.

“The two constraints in the market that dictate what’s likely to happen [this] year are the fact that there are just too few homes on the market, and basic economics says that if there are a lot of buyers and not many homes to buy, that results in home price increases,” Bishop says.

Home prices have risen 48 percent from their low in 2011, while wage growth has only climbed 15 percent over the same period. In the past five years, home prices have increased more than 6 percent annually, but experts expect a slowdown this year, with prices only rising 3 to 4 percent. NAR adjusted its forecast to 2.1 percent — slower than the 5.5 percent estimate announced before the tax bill passed.

The widening gap between home values and income levels could begin to narrow this year — at least, until mortgage rates start to climb.

3. “Rates have nowhere to go but up.”

Dawn Thilmany

After several years of dormancy, 30-year fixed-rate mortgages could finally rise from historical lows.

“Everybody’s been predicting that interest rates are going to increase any time now, and they haven’t,” Bishop says. “The safe bet is that interest rates have nowhere to go but up.”

NAR predicts that mortgage rates will climb to 4.5 percent by the end of 2018, a forecast echoed by Redfin and Zillow. Freddie Mac’s forecast is slightly lower, with rates sticking around 4.25 percent. Realtor.com expects slightly higher rates, hitting 5 percent by the end of the year.

The combination of rising home prices and increased interest rates could chip away at affordability — especially when homeowners feel the added impact of tax reform.

In 2017, the housing market experienced a surge in activity and an increase in home prices due to a flood of new buyers and a stock shortage. That is expected to continue for the most part in 2018. Surveys suggest that outdoor features like patios, decks and front porches are increasingly important to buyers, especially Millennials, and are must-haves in some cases.
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4. Tax reform could stunt growth.

By capping deductions for mortgage interest and property taxes, new tax legislation threatens to slow housing growth this year.

“If you’re a homeowner and you can’t deduct as much as you had before, the cost of owning a home is going to be higher because of tax reform,” Bishop says. “The result, from a national perspective, is slower growth in prices.”

This will be most significant in areas that already have high home prices, like New York, L.A., Seattle and Dallas. Moody’s Analytics predicts that housing prices will drop 4 percent lower than they would have without tax reform, while some counties in New York could see prices drop 10 percent or more.

5. Millennials will shape the market.

Some research suggests that homeownership among people younger than 35 has dipped during the past decade, but Bishop says it’s a misconception that Millennials want to rent forever. He says homebuying activity for this generation, (definitions vary, but generally people born between 1980 and 1998,) has just been delayed by financial constraints like student loan debt. According to NAR’s monthly survey of households across the U.S., 90 percent of Millennials want to own a home in the future.

“Millennials are the next wave coming through the housing market,” Bishop says. “By our estimate, Millennials account for a third of home purchases, and they’re going to make their presence increasingly known in the next 2 to 5 years.”

Unfortunately, Millennials are facing a short supply of starter homes with soaring prices, rates set to rise and tax reform affecting affordability. These pressures could keep some Millennials in rentals for now, while keeping Baby Boomers in their homes longer, causing many to consider remodeling rather than moving.

Although Millennials comprise about a third of the home buying market now, that is expected to increase in the next few years, as 90 percent indicated they want to own a home in the future, according to NAR’s monthly survey of households in the U.S. They prioritize outdoor spaces and features like decks, which is good news for garden centers.
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What it means for IGCs

Garden centers are uniquely positioned to take advantage of this year’s housing market. Whether consumers are buying a new home, remodeling an old one, or continuing to rent instead, they care more about outdoor spaces than they used to.

“There’s continuing evidence that people want outdoor living environments,” says Dawn Thilmany, PhD, professor of agribusiness management in the Department of Agricultural and Resource Economics at Colorado State University. “That trend is going to continue to be important to everybody, especially Millennials.”

In the latest housing preference survey from the National Association of Home Builders, Millennial buyers were the only generation to have three outdoor spaces in their top 10 most wanted home features: deck, patio and front porch.

“(Millennials) are driving the outdoor living space trend, for sure,” Thilmany says. “The old version of outdoor living space was a huge built-in grill and large patio furniture, and (Millennials) want more natural elements, from living walls to edible landscapes. They’re redefining what outdoor living spaces look like.”

Led by Millennials and edible enthusiasts, the DIY garden industry continues to grow steadily, according to the National Gardening Survey released in 2017.

One way IGCs can leverage this trend is by offering hands-on educational workshops, with opportunities to share progress on social media.

“This generation wants to feel like they did it themselves and customized it to be exactly what they wanted,” Thilmany says. “But they need guidance, so perhaps a garden center has classes on how to build your own living wall. Garden centers can become a partner by providing creative, flexible, modular ways for people to think about their yards.”

These classes can also benefit boomers who are remodeling or adjusting to limited mobility.

In fact, Thilmany says, the most successful events appeal to renters and homeowners alike, across generations.

“Container gardens are one strategy that appeals to all three: renters, owners of condos/townhomes, and aging homeowners who want lower maintenance,” she says. “With low upfront investment, flexibility, mobility and potential water savings, container gardens appeal to a large set of people.”

When combined with ongoing classes about updating these container gardens seasonally, IGCs can offer year-round education to serve all stages of homeownership as the housing market hovers between generations.

“Garden center retail sales have the opportunity to increase,” Thilmany says, “but only for those managers who are willing to risk carrying new design elements in their stores, adding classes and events in prime planting season to attract new customers, and providing year-round opportunities for passionate gardeners to update their spaces.”

Brooke is a freelance writer living in Cleveland and a frequent contributor to Garden Center.