The housing market holds its own amid economic and political challenges.

Trade tensions, lackluster business investment, a volatile equities market and political uncertainty could create economic challenges in the new year; however, the real estate industry—and the lending market that supports it—remain on relatively firm footing.

That’s not to say there won’t be challenges in 2020 for private lenders, real estate investors and others who make their living supporting the real estate investment market. Indeed, constrained inventory and affordability concerns will continue to be challenges, just as they were in 2019.

As the nation’s economic expansion enters its eleventh straight year, Fannie Mae predicts real gross domestic product growth to be around 1.9% in 2020, aided by the return of accommodative fiscal policies, easing trade tensions and healthy consumer spending. In other words, decent but not spectacular economic growth appears to be on tap for the year ahead.

Volatility—be it in foreign trade or in the equity markets—was the norm during much of 2019, but even with such unsettledness, the housing market picked up strength during the second half of the year. In a late-year housing commentary, Fannie Mae noted that residential fixed investment grew in the third quarter of 2019 by a strong 5.1% annualized pace amid contributions from single-family housing construction, home improvements and brokers fees.

The Mortgage  Market

For lenders, there’s stability,  but not much growth expected in the mortgage market as the new year dawns. The Mortgage Bankers Association (MBA) expects total mortgage originations for 2019 to total about $2.06 trillion—the best since 2007 (which saw $2.31 trillion). Going forward, the MBA predicts a decline in total originations for 2020 to $1.89 trillion. The forecasted decline is attributed to an expected  fall in refinances.

A global economic slowdown coupled with political uncertainty kept mortgage rates in 2019 below experts’ forecasts, which gave refinances a big boost. Some of that refinance activity is expected to spill into the first half of 2020, according to Mike Fratantoni, MBA’s chief economist and senior vice president for research and industry technology.

Continued low mortgage interest rates will be good news for the real estate investors that private lenders count among their core clients. Should interest rates remain low, investors may be more inclined to continue using financing as opposed to all-cash purchases in the fix-and-flip and rent-to-hold segments of the housing market, especially in markets where home prices have reached new highs. This feels like really good news for private lenders.

The most recent data available from ATTOM Data Solutions shows that for third quarter 2019, financing on investor residential real estate deals dipped to 41.5% compared to 46% in the year-ago period. Still, higher-cost cities showed higher rates of investor financing. San Jose, California, had the highest rate of investor financing (59.4%) followed by Providence, Rhode Island (56.9%), Seattle (56%), Boston (54.9%) and San Diego (53.4%).

Profits in the home-flipping business are down. Investors reported a 40.6% return on investment in third quarter 2019 compared to the original acquisition price, down from a 41.1% percent gross flipping ROI in second quarter 2019 and down from 43.5% in the third quarter of 2018.

As projected and realized profits on home flipping dip, some real estate investors are turning more of their attention to the buy-and-hold rental market. Many private lenders are keenly aware of this and have scrambled to fine-tune their lending programs in order to better serve the buy-and-hold market.

The MBA’s mortgage credit availability index rose for three straight months from September to November 2019 (December statistics weren’t available at press time), an indication that credit was loosening as the year drew to a close. The jumbo index climbed to a record high, as investors showed a penchant for buying purchase loans with lower credit scores and higher LTV ratios, the MBA said.

Housing Price Increases to Decelerate                

Affordability will continue to be a major issue for the housing market throughout 2020. Single-family homes and condos sold for a median price of $270,000 in the third quarter of 2019, up 8.3% from 2018 to a new high, according to ATTOM Data Solutions. Median home prices, the real estate data company said, were not affordable for average wage earners in 74% of the counties it studied nationwide.

Price acceleration won’t hit the brakes entirely in 2020, although experts expect a tapping of the brakes with home prices growing at a more modest rate. This should be good news for housing affordability. Due to housing price appreciation, tight inventory and stiff competition with first-time homebuyers, real estate investors have faced acquisition challenges, especially at the highly competitive affordable end of the housing market where many real estate investors operate.

However, housing experts expect modest price increases in 2020 as additional housing supply enters the pipeline via new construction but amid tight inventory. Slowing price growth coupled with continued low mortgage rates bode well for the housing market, especially for millennial first-time homebuyers and investors operating in the affordable single-family segment.

Realtor.com predicts home prices will fall in a quarter of the 100 largest metropolitan markets, including Chicago, Dallas, Las Vegas, Miami, St. Louis, Detroit and San Francisco.

Home Sales to Dip

Realtor.com also predicts that sales of existing homes will dip by 1.8% in 2020. The shortage of homes for sale could become particularly acute, perhaps even the worst in U.S. history, once the nation hits the spring/summer home buying season when more millennials are expected to enter the market. Lack of inventory is expected to continue to be a significant challenge for real estate investors in 2020.

The inventory challenge has also been exacerbated by homeowners who are staying in their homes longer, which means they aren’t putting inventory into the first-time homebuyer pipeline. The typical homeowner now stays 13 years in their home before selling or trading up, according to Redfin. That number was eight years in 2010, Redfin reports.

The growing phenomenon of “aging in place” has also had the effect of reducing the number of homes for sale. Freddie Mac says homeowners between the ages of 67 to 85 are remaining homeowners longer and are causing a shortage of 1.6 million homes.

Besides homebuyer demand, demand for rental housing of all types also remains very strong. That is good news for private lenders catering to this market. Rental housing will remain a good option for millennials priced out of  the market or who desire to remain renters.

Housing’s Downside Risks

The presidential election, meanwhile, is getting into full swing with a slew of Democratic candidates campaigning. On the Republican side, the eventual election impacts of President Trump’s impeachment trial acquittal remain uncertain.

Besides political risks, consumer concerns about an  economic cycle long in the tooth and consumer caution that is inevitable in an election year is a downside risk for the housing market.

Although there isn’t a direct connection between a presidential election and the housing market, it is a potential wild card, realtor.com says in its Housing 2020 Forecast.

“Business optimism and investments, along with consumer confidence and spending do influence economic output, and can also influence housing activity,” the report notes. “The 2020 elections will be closely watched by consumers and businesses for indications of potential changes.”

Overall, it may be much of the same for the national housing market with supply-demand and affordability driving some housing markets to thrive and others to contract.