Last year's sales slowdown, combined with the decidedly mixed data through the first half of 2019, certainly suggested that housing had passed its peak in this cycle.

But the latest Health of Housing Markets Report (HoHM Report) from Nationwide Economics sees more positive, sustainable trends for the housing sector for at least the next year.

"Economic figures from early in the year were probably negatively affected by the government shutdown as well as the impacts of higher interest rates over the second half of last year," said David Berson, Nationwide senior vice president and chief economist. "Despite that, we believe that the housing market is poised for another solid year as slower house price growth and lower mortgage rates help affordability, while job gains and faster income growth sustain demand."

The report's proprietary Leading Index of Healthy Housing Markets (LIHHM) is at its highest point in three years. Solid job growth and strong household formations are driving the positive outlook. LIHHM is unusual among housing market indices as it is a forward-looking measure of housing market sustainability.

Through the first quarter of 2019, more than half (221) of the LIHHM regional performance rankings were positive, and only 27 were negative. By comparison, only nine LIHHM regional performance rankings were positive at the end of 2005 – just before the last housing crisis – and 255 were negative.

The 10 metro areas with the most positive LIHHM forecasts are, in order: Sumter, S.C.; Sebastian-Vero Beach, Fla.; Charleston, W.V.; Hinesville, Ga.; Abilene, Texas; Vineland-Bridgeton, N.J.; Port St. Lucie, Fla.; Montgomery County, Pa.; Springfield, Mass.; and, Pittsfield, Mass.

The 10 MSAs with the least positive LIHHM outlooks are: Kennewick-Richland, Wash.; Pueblo, Colo.; Yakima, Wash.; San Jose, Calif.; Chico, Calif.; Manhattan, Kan.; Ames, Iowa; Ogden-Clearfield, Utah; San Rafael, Calif.; and, Odessa, Texas.

Higher mortgage rates drive down 2018 sales

The slowdown in home sales activity during 2018 has been well documented. Despite a solid job market and faster household growth, sales of single-family existing homes fell by just over 3 percent from 2017. Rising mortgage rates (up by as much as a percentage point last year) and the resulting retreat in demand were a prime cause, while the still low supply of homes also held back a portion of sales transactions. 

At the regional level, existing home sales declined in 39 states for 2018, according to data from Moody's Analytics. Many states saw declines greater than the national average, including drops of more than 8.0 percent in:

California, -9.7 percent

Washington, -8.9 percent

Connecticut, -8.3 percent

Massachusetts, -8.3 percent

Pennsylvania, -8.1 percent

There are three factors that have historically driven movements in home sales: population growth, job gains, and affordability. Changes in population tend to influence longer-term sales trends more than year-to-year changes. While job gains did slow in a few of the states with contracting sales, there was still positive payroll growth on average — likely meaning that this was a minor factor in reduced sales activity.

That leaves affordability as the primary factor that caused sales to decrease. Many of the states with the largest declines in existing sales also have the highest prices. Given already low affordability, these areas would be most sensitive to movements in rates and prices.