Affordability Helps the Housing Market

Taking a look at factors that will influence the building market for the remainder of the year


Spring is here, and the best for-sale housing affordability in 15 months is helping builder sales and pricing. Spring 2019 is not as robust as last year, but builders remain cautiously optimistic. The trifecta of lower mortgage rates, less home-price appreciation, and rising incomes has improved affordability after the mortgage rate increase in the last half of 2018. This revival in affordability has brought back pent-up demand and new home shoppers from the sidelines. However, new home shoppers are also newly emboldened, taking their time shopping around, and they continue to push builders on price.

Sun Belt markets (e.g., Phoenix, Vegas, and Austin) are performing better. Markets in the Sun Belt are generally outperforming the Midwest, Northeast, and expensive coastal markets. Phoenix, Vegas, and Austin remain solid markets for builders, while expensive coastal markets like the Bay Area and Orange County continue to exhibit weaker sales and pricing conditions. Flipped homes data shows that flippers remain active in Southeast markets like Raleigh-Durham, Atlanta, and Charlotte—markets where prices are still steadily rising. Flips declined 13 percent year-over-year in San Jose and San Francisco— markets with weaker prices. We track flipper data, as these investors provide a good lead on home demand frenzy. Single-family construction volumes also show wide disparity between markets. Single-family permits gained 15+ percent year-over-year in Orlando and Phoenix and declined by 25 percent in San Diego and Orange County. Chicago is the weakest new home market across our top 50 housing markets.

For 2019, we continue to expect two percent lower new home construction volumes and seven percent lower existing home sales. We forecast modest resale price appreciation of two percent and only one percent more in new home price gains (net of incentives). We continue to forecast a modest housing ‘hiccup’ in 2020–2021.

Why are we not revising our forecasts if affordability has improved? The economy has slowed. Interest rates are falling because the economy is slowing. The Fed has paused planned rate hikes for this reason. This is a cautionary signal for the economy and housing demand. In our own monthly research reports on the national economy, we analyze 300+ data points that show many leading and current economic indicators have slowed in recent months. Weaker economic growth will slow demand, even if affordability improves.

New home sales have picked up partially due to heavy incentives and/or price cuts. We would need to see April and May market conditions maintain or exceed March’s momentum for us to raise our sales forecasts. Much of the momentum in the market can be attributed to price weakness and builder incentives. For reference, in our monthly builder survey, 10 percent of builders dropped net prices in March, typically via incentives. This is especially acute in expensive coastal markets like the Bay Area.

Mortgage policy is starting to shift toward tightening. Mark Calabria was just confirmed as the new Director of FHFA, overseeing Fannie/ Freddie (45 percent of mortgage originations). GSE reform has been delayed for over a decade but appears to be gaining traction. Mr. Calabria has indicated he wants to privatize the GSEs and has outlined his steps for undertaking this massive endeavor. The government guarantee behind mortgage securities is likely to become less explicit under his guidance.

Recently, the FHA announced loans with credit scores below 620 and debt-to-income ratios (DTIs) above 43 percent would require manual underwriting (which was a standard policy prior to 2016). We believe this will result in slightly fewer mortgages being underwritten. For perspective, default rates of 2007-vintage Freddie mortgages with FICO scores of 620 or below and DTIs of 43 percent or higher were roughly 25–55 percent.

Kate Seabaugh is a Manager in the Research Group at John Burns Real Estate Consulting. She may be reached at

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