Despite lower affordability, demographic trends will continue to support housing demand
Home price appreciation will decline but remain above inflation in the short- to mid-term
Tighter financial conditions will balance some of the regional disparities built up over the last decade
The housing market, which has been in a robust expansion mode since 2012, started weakening in the second half of 2018. Existing and new home sales declined, while new construction and home prices slowed down. This has come as a result of the sharp decline in affordability, which in turn was a result of higher mortgage rates (Figure 1). The lower level of affordability means that fewer buyers can afford to enter the housing market. Lower demand suppressed sales, which affected prices, which in turn impacted new construction. While interest rates bear most of the blame for the current slowdown, they come on the back of a six-year stretch of home prices outpacing income, sometimes to a significant degree (Figure 2). This outlook takes stock of the current state of the housing market and presents our outlook for 2019 and beyond in both the single-family and multifamily segments.
Interest rates and affordability
The 30-year fixed mortgage rate reached a high of 4.94% in mid-November – one percentage point higher compared to a year earlier. An increase of this magnitude translates to an 11% increase in monthly mortgage payments for a median-priced home of $260,0001 – from $983 to $1,104. At an annual level, this represents an increase of $1,462, which is close to 2.4% of median household income.2 The increase in interest rates would have particularly affected lower income earners in high-cost locations. Coupled with still solid home price appreciation, which is a result of a limited supply of homes for sale, higher interest rates have resulted in lower demand, which is likely to persist in the short to medium-term.
At year-end 2018, the 30-year fixed mortgage rate, which accounts for more than 70% of total outstanding residential mortgages, stood at around 4.5%. We expect this rate to stabilize around 5% in the short- to mid-term, meaning that more than one-half of the impact of interest rate increases has already been absorbed by the market.
This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.