TheMReport

20 | TH E M R EP O RT FEATURE "Unlike past cycles which could be managed by sorting demand, the problem this time is on the supply side and there are no federal interventions or levers to deal with that." —Sam Khater, Chief Economist, Freddie Mac T he year 2018 has been a good year for the economy that posted a solid GDP growth of around 3 percent in October. Unemployment, another key in- dicator of the economic health, is falling and the Bureau of Labor Statistics recorded more open positions than unemployed at over 7 million compared with under 6 million for the latter. Yet, a recent Bloomberg report pointed out that the housing market "remained a weak spot posing the third consecutive drag on GDP growth with a contraction of 4 percent." The year has clearly not been as good for housing as it has been for the overall economy. Will 2019 bring some relief? To know the future trends, we first need to understand the pres- ent. Recent housing market data indicates a slowing down amid higher prices, rising mortgage rates, and a shortage of affordable inventory. Home sales have been falling consistently over the past seven months according to the National Association of Realtors' (NAR's) Existing Home Sales data that reported a decline of 4.1 percent in home sales at the end of September compared with the same period last year. NAR also predicted that home sales would flatten in 2019 as home prices continued to grow. But the latest S&P CoreLogic Case-Shiller Home Price Index found that home-price growth might be softening. For the first time this year, the index registered a home-price growth below 6 per- cent in August 2018. "Following reports that home sales are flat to down, price gains are beginning to moderate," David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, said in the report. On the bright side though, the pressure on inventory, that was an overarching concern for the industry for most of 2018 seems to be easing a bit. The inventory of homes on the market grew by 2 percent nationally in October for the first time in four years, accord- ing to a report by Realtor.com. Are these indicators then a harbinger of another crisis for a market that finally pulled itself out of a recession only a few years ago? Not really. "Think of it as a pause, rather than a slowdown," advised Sam Khater, Chief Economist, Freddie Mac. "As long as the economy re- mains hot, housing should remain active." The signs, according to Khater, have been there since late 2017, starting with the deceleration of home sales at that time, the rising mortgage rates since mid- 2018, and the "fairly elevated home prices" for most of this year. But it is the decline in affordability that has caused the biggest lag. Having said that, these five trends are likely to shape the housing market in 2019. 1. The Rate Roulette K hater's sentiments are echoed by Frank Nothaft, Chief Economist at CoreLogic who saw rising mortgage rates as a key factor affecting the affordability of homes in the lowest price tier. While mort- gage rates have averaged 4.9 percent recently, Nothaft noted during a recent webinar that the consensus in the marketplace for the coming year was towards an upward pressure of close to 5.2 percent by the end of 2019. "That will place mortgage rates at their highest level since 2009," he said. For first-time homebuyers, especially millennials who were looking to transition from renting to homeownership, these rising rates would likely make them pause their decision. And not without reason. "For millennials who have been familiar with an extraordinarily low level of interest rates, they'll see the highest mortgage rates that they have seen in their adult lifetimes," Nothaft said. "Just over the last year, with the rise in mortgage rates coupled with the increase in home prices that translates to an approximate 20 percent increase in just this one year in the monthly principal and interest (P&I) payment to buy exactly the same home that you could have bought a year ago. In contrast, rents are rising about 3 percent on single-family homes and that underscores some of the challenges that millennials may be facing in the coming year in making that switch from renting to homeownership." Home prices and mortgage rates are two key hurdles that Doug Whittemore, Head of Mortgage and Consumer Default Services at U.S. Bank, also fore- sees. The combination of rising home prices and mortgage rates could mean that the monthly P&I equivalent for the median home was likely to jump as much as 30 percent in 2019, compared to last year, if all things trended as projected. Sonu Mittal, SVP and Head of Retail Lending for Citizens Bank Home Mortgage, echoed this sentiment. "Rising rates, combined with home-price increases and low inventory in most markets in the U.S. are impacting affordabil- ity in 2018 and will likely continue to factor into affordability in 2019." Existing homeowners, too, will feel the pinch of rising interest rates. "Considering the majority of the market now sits with a 30-year fixed-rate mortgage below 4 percent, an existing homeowner could find a scenario where they would spend significantly more for less house than they already have," Whittemore observed. "Jumping from a rate of 3.75 percent to 5.5 percent would result in a 22 percent increase in P&I for the exact same home." The 5.5 percent projection by Whittemore is not far off the mark either with both Khater and Nothaft pointing to the pos- sibility of rates rising to around

• Cover