For first-time homebuyers, 2018 won't be any easier

Inventory shortage expected to continue

Builders picked up the pace of new-home construction n 2017, though most of those homes went up up in higher-priced markets. (Justin Sullivan/Getty Images)

Prospective buyers who struggled to find a home in 2017 aren't likely to find the quest any easier in 2018.

The biggest hurdle will be a familiar one: the nationwide shortage of homes for sale. Supply dropped more than 12 percent in October, the 25th straight month of declining inventory, and the steepest decrease year-over-year since 2013.

That shortage will likely continue next year, says the real-estate data company Zillow, and be a key factor in rising home prices. The median price for an existing house topped $245,000 in September,  Zillow reports, the 67th straight month of year-over-year increases.

The inventory conundrum will push prices up 4.1 percent in 2018, according to housing experts and economists surveyed by Zillow. That's slower than the current pace of 6.9 percent, but faster than the historical rate of growth of about 3 percent.

More than half the homes for sale in October were priced in the top one-third of values, putting them beyond the means of many younger first-time buyers. While recent data suggests builders are picking up the pace of new home construction, most of those homes are going up in higher-priced markets.

Zillow predicts builders will focus more on entry-level homes next year, allowing younger buyers access to more affordable homes. But there's a catch, says Svenja Gudell, Zillow's chief economist: They may have to leave the city for the suburbs.

"Escalating land and construction costs – along with zoning laws – make it prohibitive for builders to add affordable housing in cities near jobs," Gudell said. "As a result, that’s where millennials and first-time home buyers will flock for the greater variety of homes at relatively lower prices."

Gudell compares the current housing market to "a game of musical chairs," with many homeowners choosing to stay put rather than risk being unable to find another home to buy. Instead, home renovations and remodeling will continue to boom in 2018, which will only make it more difficult for prospective buyers.

"Inventory overall will remain very tight," she says, "and the musical chairs phenomenon won’t fade quickly."