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Headwinds and Tailwinds for Today’s Housing Market

Home prices are expected to grow at a 5 percent rate this year. Learn how rising interest rates will impact mortgage rates and overall market conditions.
August 23, 2018

The fundamentals of the housing market today are performing well. There’s been a 2 percent growth in the housing market already and a total of 5 percent base growth expected by year-end. Overall market conditions will have an impact on housing, with eight interest-rate hikes expected from the Federal Reserve for 2018 and 2019 combined. Other factors, including relatively low housing supply, the lending environment and even student debt, will have an impact on the housing outlook.

State of the Consumer

Since the 2008 financial crisis, the consumer market has deleveraged meaningfully, while corporations have taken advantage of lower interest rates to reduce their debt burden. As we approach the upcoming Fed hiking cycle, US consumers should be insulated from interest rate hikes.

One headwind for the market is the impact of student loan debt on home ownership. The rising costs of college are weighing on the housing market, and household formation is a challenge. The amount of outstanding student loans is increasing, and people are carrying debt longer into their thirties.


Household Formation Is a Challenge

Household formation chart

Source: J.P. Morgan, US Census CPS, FRBNY Household Debt and Credit


First-Time Home Buyers Are Stagnant


2010 data
2018 data

Homeownership for people under age 35 is decreasing for a few reasons:

  • Young people have more student loan debt.
  • There is a preference to rent over buying a home.
  • Tighter lending standards have made it harder to buy a home.

Note: Annualized numbers; first-time homebuyers are a subset of the full existing home sales number.
Source: National Association of Realtors

Housing Fundamentals

Housing supply is relatively low and this, combined with low unemployment, is a big driver of the housing forecast. The annual rate of existing homes for sale has decreased significantly since 2015.

Net demand for housing is going up each year, while unemployment is plunging. It’s a tighter supply market for housing year over year.

2018 data
2018 data

Source: J.P. Morgan, NAR, Bloomberg


Buying Is Cheaper Than Renting in Many Parts of the Country

Chart6

Source: J.P. Morgan, Federal Reserve Board, CoreLogic, Axiometrics


While home prices are moving up and mortgage rates are trending higher, rental prices are also going up and rental vacancies are low. Renting is looking to be a more expensive option, and that market is tightening too.

Foreign demand is driving growth in housing in the US. Affordability indexes for housing are complicated by non-US buyers and foreign demand. The overall share of home purchases coming from non-US citizens is rising each year.

Market Conditions

The upcoming interest-rate hikes will drive mortgage rates higher. Over the last 10 years, there’s been a regression in home price changes versus net demand. This trend data helps us estimate that roughly every 100 basis points in mortgage rates is worth about 1 percent in home prices, which can help us forecast how much home prices will go up in relation to mortgage rates.

Chart6

At the peak, the Federal Reserve owned $1.7 trillion of mortgage-backed securities. Looking forward, as this begins to taper, it will weigh on mortgage rates and mortgage investors as the private sector absorbs this runoff.

Lending Environment

In today’s prepayment environment, the credit box is evolving, which impacts whether borrowers can access credit. It’s estimated that only 10 percent of the market today is refinanceable, and there is less refinance response. This is because:

Arrows
Borrowers are refinancing less due to the higher interest-rate environment. We’re at some of the flattest and least-responsive conditions we’ve seen for refinancing.
Circuit
Fintechs are boosting refinance efficiency by automating processes, such as income and asset underwriting and verification, to create a customer experience that is faster and less costly.
Money
Tighter lending standards have kept some first-time homebuyers out of the market—but conditions are easing.

While the excesses of lending are in the past, the credit box is opening. Home prices are still expected to grow at a base 5 percent this year. Looking ahead, there is positive appreciation expected for home prices, though it is trending downward, driven by the growth of home prices versus income growth.


Matthew Jozoff is Managing Director and Head of Securitized Products and US Rates Research for J.P. Morgan Securities.

Used with permission. The opinions expressed herein are those of the author and do not necessarily reflect that of JPMorgan Chase. JPMorgan Chase believes the information contained in this material to be from reliable sources but make no representation or warranty as to its accuracy or completeness.

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