Peering into the Housing and Mortgage Outlook with 20/20 Vision

Home prices up and affordability erodes; mortgage delinquency remains low

By FRANK E. NOTHAFT

The housing market benefitted during 2019 from mortgage and unemployment rates both below four percent, the first time this has happened in the post-World War II era. In 2020 we expect more of the same: while economic growth will likely be slower than during 2019, coming in close to two percent growth for 2020, it will be sufficient to continue sub-4 readings for mortgage and unemployment rates.

This economic environment should add to first-time buyers’ desire to own. But with supply expected to remain lean, especially for lower-priced homes, look for a quickening in price growth and for lower-priced homes to appreciate more than higher-priced. The Census Bureau’s new-home price index was up 2.9 percent and the CoreLogic Home Price Index (HPI) gained 3.3 percent in the third quarter of 2019, year-over-year. Our HPI Forecast has prices for existing homes rising 4.8 percent in 2020 (annual average, relative to 2019), and we expect new-home prices to rise about four to five percent as well. And with cap rates
at all-time lows and rental vacancy rates at a generational low, expect apartment building values to rise in 2020, albeit less than last year.

Rising home prices will create more home-equity wealth in 2020, helping to sustain consumption spending. It also means that overall delinquency and foreclosure rates will likely remain at or below current levels, already the lowest in 25 years.

But with higher prices comes lesser home affordability, and it affects renters too. Our Single-Family Rent Index found rents up three percent nationally over the year ending September 2019, more than double the infla- tion rate of 1.3 percent (as measured by the Personal Consumption Expenditures Price Index). As shelter takes a bigger bite out of families’ pocketbooks in 2020, a solution is to build more homes.

We expect more housing starts in 2020 than in 2019, but these new homes will generally add supply in the higher price and rent buckets, not in the less expensive tier. In part, this reflects the rising costs of labor, land, and materials, which have risen about twice as fast as inflation over the last three years.

The Bureau of Labor Statistics reported that compensation costs for private-sector construction workers grew 3.4 percent in the third quarter of 2019, year-over-year, and was up 9.2 percent over the prior three years (as measured by the Employment Cost Index). Lot values in the U.S. rose 10.3 percent between 2015 and 2018, double the pace of inflation. Our CoreLogic Construction Cost data has found each major material cost has outpaced inflation since 2016. (Exhibit 1) While some material costs may rise at a slower pace in the coming year, taken together and factoring in higher labor expense and lot values indicates that the trend of building costs outpacing inflation is likely to continue in 2020.

Across metropolitan areas, the largest number of new home sales has occurred in the South and West, and our forecast has that continuing in 2020. The Dallas, Houston, Atlanta, Phoenix, and Austin, TX metropolitan areas topped the list of new single-family building with each having more than 15,000 new sales during the twelve months through September 2019. All five of these areas have low unemployment rates and employment growth that exceeded the national gain. The ten largest metros by new home sales were all located in the South and accounted for more than one-quarter of national new-home sales.

One final point: Local neighborhoods may deviate widely from the expected national trends. As an example, while our U.S. HPI was up last year, there were 20 metropolitan areas that experienced a decline in price. Likewise, while our HPI Forecast shows a rise in our national index in 2020, the CoreLogic Market Risk Indicator has identified several metro areas that will likely see price declines. And delinquency rates will rise in locales affected by a weakening economy or by a natural disaster.

Frank E. Nothaft is the Executive & Chief Economist for CoreLogic. To learn more, please visit www.corelogic.com.

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