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Consumers everywhere still concerned with housing affordability

December 4, 2018

The cost of buying a home is starting to reverse course, to a certain extent. While it is still on the rise - and is expected to continue along that path for some time to come - the rate at which home prices are growing has slowed in recent months, thanks to an affordability pinch that is impacting both buyers and sellers. Indeed, housing affordability seems to be on the minds of many people on both sides of the real estate market these days.

"October's pending home sales declined 6.7% year over year."

In October - the most recent month for which data is available - the number of home sales that were in the works but had yet to be completed across the U.S. dropped 2.6 percent on a monthly basis, and 6.7 percent year over year, according to the latest Pending Home Sales Index from the National Association of Realtors. This marked 10 straight months of declines on an annual basis, driven by both a relatively small number of homes for sale and the fact that prices and mortgage rates continue to rise pretty much nationwide.

This is a similar situation to what played out in 2013, when mortgage rates rose by a full percentage point, and it took nearly a full year for sales numbers to rebound while consumers re-acquainted themselves with what constitutes housing affordability, and rates also shrank once again (albeit not to the levels seen prior to the increase), NAR chief economist Lawrence Yun noted. This time, though, it will come after similarly large increases in mortgage rates, as well as several more years of higher-than-average price increases, putting a squeeze on shoppers.

"The recent rise in mortgage rates have reduced the pool of eligible homebuyers," Yun said. "But this time, interests rates are not going down. In fact, they are probably going to increase even further. 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. So, while the long-term prospects look solid, we just have to get through this short-term period of uncertainty."

What the immediate future holds
Indeed, mortgage rates are still slightly lower than where they were prior to the economic downturn, in addition to being well below all-time historical averages, but that likely won't be the case for much longer, according to new predictions from Zillow Research. Over the course of 2019, the rates on a 30-year fixed-rate mortgage - most often used to facilitate a home purchase - are expected to average about 5.8 percent, about a full point higher than where they currently stand. Mortgage rates haven't been that high since 2008.

Those rising costs will, in turn, wipe out some of the value current homeowners have gained in recent years, meaning they may have less incentive to sell than they do now, the report said. That, in turn, could keep inventory depressed, meaning home prices could continue to rise at rates greater than the historical average even as fewer buyers are interested in actually getting into the market.

Zillow's most recent data suggests that median home prices were up 7.7 percent on an annual basis in October, despite the slowdown in sales, but that should slow to 6.4 percent by October 2019, the report said. As recently as March, those increases were as high as 8 percent, representing some cooling in the market already, with more to come.

A granular look
In California, where most experts concede that home price growth has been overheated for years, housing affordability has become a particularly prevalent issue, according to Sustainable Sonoma's recent Voices of Sonoma Valley survey. In fact, area residents cited it as the single biggest issue they face in their daily lives. Housing in general was cited as a hurdle by about 1 in 8 people polled, with the most common issue there specifically drilling down on the region's lack of affordability, cited by almost all those respondents.

The issue was so prominent in the survey that it often came up in questions about other topics, just as often as it did for questions specifically about housing and the cost of living, the report said.

"The opinion expressed most often, twice as often as the next most common opinion, was that Sonoma Valley should have more affordable housing of many types and prices," the authors of the survey wrote. "People want to see a wider variety of housing options, that can be afforded by people who work in the Valley, at all income levels."

Meanwhile, across the country in New Hampshire - where prices haven't been rising anywhere near as quickly as California's in recent years - demand for housing remains high but concerns about affordability are cropping up, according to New Hampshire Housing Finance Authority's latest Housing Market Report. That's because, as with the majority of other markets, even when there are homes for sale, they're typically not affordable to lower-income, younger consumers.

Inventory levels in the Granite State are on the rise after bottoming out in 2016, and home prices have, on average, recovered the value lost during the economic downturn, the report said. Building is on the rise statewide, but homes typically aren't available at a low enough price point - under $300,000, for example - to entice first-time buyers in particular. Meanwhile, rising mortgage rates have added about $300 in monthly costs for homes priced at just $225,000. As with many other states, incomes aren't rising nearly as quickly as home prices.

Can builders help meaningfully?
One of the biggest things that could help meet the sky-high demand for homes that lingers in many markets, particularly those with relatively few lower-priced options for sale, is for builders to simply put up more houses. But according to the latest National Association of Home Builders/Wells Fargo Housing Market Index, confidence among contractors is down sharply these days.

"Homebuilder confidence slipped nearly 12 percent."

In November, confidence in the market about the number of consumers for newly built homes slipped nearly 12 percent, falling to a reading of 60 from October's 68, the report said. That's set against a benchmark of 50 - meaning builders are still generally more confident than average - but the decline is largely being attributed to rising prices and rates impacting affordability.

"For the past several years, shortages of labor and lots along with rising regulatory costs have led to a slow recovery in single-family construction," said NAHB Chief Economist Robert Dietz. "While home price growth accommodated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall."

Moreover, Dietz noted that both aspects of affordability are only expected to keep rising for some time to come, meaning that consumers will continue to be further squeezed despite the strong economy, potentially because wages are, again, not rising commensurately with prices or rates, the report said.

To that end, all aspects of the HMI indices took a step back in November, the NAHB noted. For instance, prospects for current sales conditions slipped more than 9 percent, expectations for conditions over the next six months fell more than 13 percent, and traffic among would-be buyers today slid more than 15 percent. However, of all those readings, only buyer traffic remained below 50 (at a reading of 45), indicating that, for the most part, current and future conditions (checking in at 67 and 65, respectively) remain well above the average seen over the past 30 years.

With all these conditions in mind, though, it's important to note that consumers who are interested in buying a home today would be wise to make sure they can get into the market as soon as possible. With prices still rising at more than double the historical average rate in many markets, and mortgage rates likewise poised to take a sizable step forward in the year ahead, locking in a deal sooner than later could end up saving them tens of thousands of dollars over the life of a loan.




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