Monitoring near-term forecasts of key national housing and economic indicators – like those from Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA) – is important in identifying potential economic changes and the impact on mortgage market trends. One such change is the most recent estimate of the annual rate of GDP for third quarter 2017, which forecasters revised upward to 3.3%, representing the strongest growth since third quarter 2014. According to the US Department of Commerce Bureau of Economic Analysis, positive contributions to GDP came from personal consumption expenditures, private inventory investment, nonresidential fixed investment and exports. Negative contributions came from residential fixed investment.

Many forecasters expect GDP to be near 2% in 2018, below 2017 levels, but just above the 1.8% the economy achieved in 2016. Employment in October rose by 281,000, reducing the US unemployment rate to 4.1%. The unemployment rate looks to stay strong, remaining near 4% through 2018, based on these economists’ forecasts.

Forecasters also project consumer price increases to remain near 2% on an annual basis in 2018, indicating inflation will continue to be held in check. The Personal Consumption Expenditures Price Index has remained low, not hitting the Federal Reserve Board’s 2% annual target in recent years. The Fed has said it will continue to monitor inflation, hoping for stabilization around its 2% long-run objective. This measure could continue to influence the Fed’s monetary policy.

Forecasts show modest increases in the 30-year, fixed-rate mortgage, with economists projecting an average rate of 4.0% in 2017 and 4.4% in 2018. With interest rates projected to steadily rise, the expectation is a larger purchase mortgage market in 2017 and 2018 compared to 2016, while overall 1- to 4-family mortgage originations look to be around $1.8 trillion in 2017 and $1.7 trillion in 2018.

Mortgage Market Trends Q4

Housing Supply

The housing market is always an interesting study because there are so many variables at work influencing market conditions. While we can consider the current state of housing to be healthy – certainly in comparison to the market during the Great Recession – economists see the supply side of housing as potentially unhealthy. The US Bureau of the Census and US Department of Housing and Urban Development track the monthly supply of houses in the United States. Data from the Federal Reserve Bank of St. Louis shows that since 2012, housing supply has hovered around 5 months, dipping as low as 4 months in early 2013 and coming in at 4.9 months in October 2017. This means that today it would take approximately 5 months to “sell-out” the current for-sale inventory of homes, given the current sales rate if no additional new houses were built1. Generally, a healthy market has a housing supply closer to 6 to 7 months.

According to Redfin, a national real estate brokerage, housing supply is even bleaker in certain metro markets. In the hot housing market of Seattle, Redfin estimates supply at only 1 month as of October 20172. Other markets that Redfin assesses at being below the national average include Boston, Washington, D.C., and Los Angeles.

So, how can housing supply increase? Well, one avenue to boost supply is for investors to sell their rental properties. However, rental income has remained strong; the rental vacancy rate was only at 7.5% in third quarter 2017, down from as high as 11% in 20093. An increase in for-sale housing seems unlikely to come from this source in the short-term. This means we need to lean on additional construction of new homes to add to today’s supply to help balance the market.

Some good news is that building permits, housing starts and housing completions have all seen upward trends in the past several years4. New, privately-owned housing completions checked in at a 1.2 million-unit, seasonally adjusted annual rate in October 2017, which far exceeds the 520,000-unit annual rate recorded in January 20115. For perspective, the recent peak of this measure was back in March 2006, when the annual rate was 2.2 million units.

Economists believe that single-family housing starts should increase by around 8% in 2018, outpacing 2017’s estimated 7% increase. Also, supply could increase as increasing home prices provide relief for homeowners with negative equity. CoreLogic estimates about 2.5 million residential properties with a mortgage are still in a negative equity state as of third quarter 2017, with 260,000 properties regaining equity that quarter6. Only time will tell whether these positive trends will begin to help satisfy the large demand for housing.

Keys to improving the unbalanced market include builders acquiring appropriate financing for building new homes and finding skilled laborers to do the work.

Other Notable Events

Please check back in early 2018 for my next quarterly update of Mortgage Market Trends.

1. [U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, Monthly Supply of Houses in the United States [MSACSR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MSACSR, Nov. 29, 2017.]
2. [https://www.redfin.com/blog/data-center]
3. [U.S. Bureau of the Census, Quarterly Residential Vacancies and Homeownership, Third Quarter 2017, Oct. 31, 2017.]
4. [U.S. Bureau of the Census, Monthly New Residential Construction, October 2017, Nov. 17, 2017.]
5. [U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, New Privately-Owned Housing Units Completed: Total [COMPUTSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/COMPUTSA, Dec. 3, 2017.]
6. [http://www.corelogic.com/about-us/news/corelogic-reports-homeowner-equity-increased-by-almost-$871-billion-in-q3-2017.aspx]

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