Will Current Negative Housing Trends Continue?

Written By: Joel Palmer, Op-Ed Writer

The biggest question facing the mortgage industry heading into 2019 is whether current negative housing trends will continue or if the market will resume modest growth.

That’s the question posed by Freddie Mac in its recently released November Forecast.

“Almost all the trends in the U.S. housing market have been negative in recent months as housing market activity continues to adjust to higher mortgage rates,” said Sam Khater, Freddie Mac’s chief economist.

One of those negative trends is overall homebuying activity. Freddie is downward revising its forecast for mortgage originations. They expect single-family mortgage originations to decline 9.9 percent year-over-year to $1.63 trillion in 2018. Originations are estimated to fall to $1.62 trillion in 2019 and $1.60 trillion in 2020.

“With mortgage rates holding near 7-year highs, refinance originations will likely take a hit, with the refinance share of originations falling to 29 percent in 2018, 25 percent in 2019, and 15 percent in 2020,” Freddie said.

The average 30-year fixed-rate mortgage rate reached 4.83 percent in October. It recently reached 4.94 percent, a high not seen since early 2011.

Freddie expects mortgage rates to gradually inch higher as Treasury yields continue to rise. They forecast the 30-year fixed mortgage rate will average 4.6 percent in 2018, increasing to 5.1 percent in 2019 and 5.6 percent in 2020.

“A moderation in the rate of increase in mortgage rates may be just enough to let the housing market catch its breath and resume growth,” Freddie said in its report.

Despite these negative trends, in its forecast, Freddie favors modest sales growth over negative housing trends continuing. One reason is stronger than expected GDP growth of 3.5 percent in the third quarter, driven by a rise in consumer and government spending.

Freddie is also optimistic because of the strong labor market, with a current unemployment rate of 3.7 percent. Initial jobless claims also remained at record-lows.

According to the National Association of Realtors (NAR), pending home sales declined slightly in October in all regions. Furthermore, year-over-year contract signings dropped 6.7 percent, making this the tenth straight month of annual decreases.

“The recent rise in mortgage rates have reduced the pool of eligible homebuyers,” said Lawrence Yun, NAR chief economist.

Yun said that while the short-term housing outlook is uncertain, he is optimistic about the long-term outlook. He notes that current sales levels match those of 2000.

“However, mortgage rates are much lower today compared to earlier this century, when mortgage rates averaged 8 percent. Additionally, there are more jobs today than there were two decades ago,” said Yun. “So, while the long-term prospects look solid, we just have to get through this short-term period of uncertainty.”

Yun expects existing-home sales this year to decrease 3.1 percent to 5.34 million, and the national median existing-home price to increase 4.7 percent. Looking ahead to next year, existing sales are forecast to decline 0.4 percent and home prices to drop roughly 2.5 percent.

The Freddie forecast estimates total home sales to decrease 1.6 percent to 6.02 million in 2018. Sales will slightly rebound by 1 percent to 6.08 million in 2019 and to 6.20 million in 2020.

Freddie says growth in 2019 and 2020 will be entirely driven by a modest expansion in new home sales. Existing home sales will remain near current levels.

“If new home sales are to resume growth in 2019, builders may have to shift their focus to more modestly priced homes and smaller sized homes to help offset housing affordability concerns,” said Khater. “But with cost pressures pinching profitability, this will be a significant challenge.”

About the Author

As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.