A close look at the numbers of the past year helps professionals get a better idea of what to expect in 2019
BY KATE SEABAUGH
First half of 2018: We see the strongest housing conditions of this recovery. The 2018 housing market started off strong in January and continued to gain steam through late summer, propelled by very solid economic fundamentals and high consumer confidence. Over nine years into this economic cycle, the economy is still adding many jobs— 2.1 million jobs added YTD, 18 percent more than YTD 2017. Economic conditions were ripe for a solid year in housing. Tax policy, passed in late 2017, also set the stage for high business confidence, capital investment, and a release of “animal spirits” to jump start the economy to start the year.
Rising rates and weakening affordability quickly become the big story in 2018. The year started off with low 4 percent mortgage rates that quickly shot up to 4.4 percent in February. The 40 basis point move had the effect of getting some buyers off the sidelines; it actually boosted the housing market during the spring selling season. Some of the hottest markets (like Seattle and San Jose) became frenzied with bidding wars, and less than one month of resale supply was commonplace. Through July, we upgraded 10 of the top 50 markets (20 percent) and were the reporting the strongest market conditions of this recovery. Builders were feeling great as their confidence level indices hit new recovery highs.
Late summer 2018: Housing fundamentals shift from great to good. Anecdotally and in the data, the market shifted in late summer as builder sales and price appreciation slowed. Consumers lost urgency and started shopping competition more diligently. Homebuyers pushed back on pricing. The affordability risk we had been talking about for years had now finally come to roost. Builders started to use more incentives to drive sales, and resale listings and price cuts became more commonplace.
Mortgage payments were up 13 percent year over year. After the initial run-up in mortgage rates in February, rates stabilized around 4.5 percent–4.6 percent in the summer months when the market was humming along. Then rates started to rise again, hitting 4.7 percent in September and then 4.9 percent in October– 1 full percentage point above fall 2017 levels. The jump in mortgage rates, and the strong price appreciation, pushed up payments by 13 percent YOY, nationally. Payments rose even more steeply in some of the hottest markets like San Jose, +26 percent YOY. After 7 years of rising pricing and incomes not keeping up, many homes buyers finally hit their limit.
Low supply is finally increasing, but resale sales are not following. We have been more confident about the fundamentals of this housing cycle, given both new and resale supply has remained subdued. Resale supply hit a 30-year low this year of only 3 months of supply. One of the talking points of the last few years has been that low supply is hindering sales. That theory has recently been tested; listings have spiked, but existing home demand is not following. We blame weak affordability for hampering demand, but also the interest rate lock-in effect.
Rising rates keep some homeowners from moving (lock-in effect). Some current homeowners are not moving, since many have mortgages with ultralow 3.5 percent–4.0 percent rates. In June, we surveyed over 8,000 homeowners on how rising mortgage rates will impact their future decision to move. Twenty-four percent reported that if mortgage rates rose 1 percent above their current rate they would definitely not move, 36 percent said they may not move, and 40 percent replied that they would still move. This is concerning because rates are now 1 percent above levels of one year ago. We have become more bearish on the move-up market.
Mortgage policy has come into focus and is a big wildcard. As is typical when rates rise, we are now seeing mortgage underwriting standards increasingly loosen, opening the credit box for buyers. New low down-payment programs and higher debt-to-income ratios should partially counteract the rise in mortgage rates, which is a short-term positive for housing and the economy but raises our concerns for the longer-term risks.
In 2018, we started noticing and following a steady drumbeat of press articles mentioning creative low-/no-down-payment programs, lower FICO score requirements, creative “algorithmic” underwriting platforms, and even low documentation programs. Debt-to-income (DTI) ratios are back to 2005–2007 levels, and non-bank lenders now dominate the mortgage market. The concentration of mortgage activity within the non-banks (particularly entry-level homebuyers) concerns us.
Mortgage policy is decided by political appointees and with several new agency heads set for replacement in 2019 (Mel Watt will be replaced at the Federal Housing Finance Agency, for instance), mortgage policy remains a wildcard and could impact the future projection of sales and pricing.
Forward view. Given affordability constraints at this point in the cycle, we expect modest construction growth and price appreciation in 2019. We are advising our clients to plan for decelerating sales rates and price appreciation next year, coupled with rising costs. We are currently forecasting a 2020/21 “hiccup” for both the economy and housing market, which is a widely held view. B DAND
Kate Seabaugh is a Manager in the Research Group at John Burns Real Estate Consulting. She may be reached at firstname.lastname@example.org