Over the past year, the unemployment rate dropped, mortgage rates rose, home sales declined and home prices increased in most areas of the country. What will 2019 bring? Freddie Mac Chief Economist Sam Khater answers questions about 2018 and what to expect in the year ahead.
2017 was the best housing market in a decade. In 2018, did it continue to improve or did we fall back?
Home sales declined and home price growth decelerated, so we fell back from that perspective.
However, the deceleration in home price growth reflects improving inventories and provides buyers who experienced tight supply for much of the year with more inventory to select from. We continued to experience a very good labor market throughout the year and mortgage rates have recently moderated, so expect to see purchase mortgage applications firm up, which is a positive development heading into 2019.
Even though mortgage rates have fallen a bit recently, they have been steadily rising this year with the 30-year fixed mortgage rate averaging around 4.5% in 2018. How have rising rates affected the market?
This year, home sales reacted more sensitively to the increasing rate environment than they have in the past. The economy is running in its second longest expansion ever and the housing market has grown in tandem with it, which has led to a substantial increase in home prices causing affordability issues for some potential homebuyers. Therefore, a modest negative headwind, like rising mortgage rates, can have an outsized impact. That?s what housing market experienced in 2018 more than anything else.
You have previously noted the lack of housing supply. Do you see this problem continuing or improving in 2019?
This problem will most likely continue into 2019, and even get worse. The main reasons for the housing supply shortage are lack of land, lack of construction labor and expensive lumber. The lack of labor and expensive lumber is cyclical. On the other hand, zoning is a structural issue that is causing the price of developed land to rise and is often an impediment to creating more supply. However, some cities and states are beginning to look at options around creating more dense zoning.
Minneapolis is a perfect example of a city adapting to meet supply issues. Minneapolis just changed zoning regulations for the entire city to allow for more development. It will be interesting to see what the impact these new zones will have on the city from a supply and affordability standpoint, as well as homeownership rates, home prices and home sales.
To be continued next week.
**Excerpts from article by Sam Khater, VP & Chief Economist, Economic & Housing Research for Freddie Mac via Economic Focus
