Affordability, not rising interest rates, will be the biggest drag on the housing market in 2016.
That’s the news Fannie Mae Chief Economist Doug Duncan delivered Tuesday at the Mortgage Bankers Association of Jacksonville’s monthly meeting.
His prediction comes from Fannie Mae’s 2016 Economic and Housing Outlook report. The annual report identifies forces that have momentum in the housing market in the coming year.
Interest rates, long predicted to rise, will not go up as much as people might expect, Duncan said. He’s expecting only a 3.7 percent rate on a 30-year mortgage by the end of 2016.
A strong dollar, low oil prices and weak international economy will keep the rates low.
A boon for real estate? Not necessarily.
Housing sales grew by 7 percent last year, the largest rate since 2007. They are expected to grow by only half as much as this year.
It’s because “housing affordability constrains as the expansion matures,” Duncan said.
In other words, prices are going up with housing’s recovery. But people’s ability to afford those houses isn’t.
Demand for homes is driven by three things: demographics, jobs and income.
The demographics favor more home sales, Duncan said.
Millennials, the largest generation, are entering their prime home-buying years.
During the recession, new household formation dropped by half from its historic average.
In the second half of the decade, it’s on track to boomerang back to prior levels. It’s what’s behind today’s price appreciation, Duncan said.
But jobs and income are not on a strong rebound.
The number of people in the labor force has been declining since 2000, mainly due to a drop in employment among working-age men.
And real incomes of households are growing at a pace that’s lower by a third than the pace they grew through most of the 20th century.
On the supply side, the picture also is skewed.
In the recovery, homebuilding has lagged. Labor shortages and the high cost of developed lots sit at the top of builders’ issues.
Normally there are 5.5 existing home sales for every one new home sale. Today, it’s up to eight existing home sales for every one new home sale.
Also, the types of homes being built don’t correspond to where demand is being created, Duncan said.
New household formation is driving most of the growth in demand. But building has focused on homes at higher price points.
“If you look at construction of new homes by square footage — the average home built post-crisis is larger than it was pre-crisis,” Duncan said.
The greatest growth in the last three years has been in homes with 3,000 square feet or more.
The problem also is appearing in multifamily markets.
“You see all Class A properties being built,” Duncan said. “Or people are upgrading Class B properties into Class A properties. Nobody’s constructing Class C properties.”
High rent-to-income ratios are dragging down household budgets and eating up savings that could go toward buying a new home.
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