Lack of inventory will continue to drive up home prices this fall, exacerbating ongoing affordability constraints and suppressing home sales, according to Freddie Mac’s August Forecast.
Presently there is a unique market dynamic at play wherein home sales are slowing even though the U.S. economy is improving. According to the report, the economy in the second quarter grew at its fastest pace in nearly four years – yet both existing and new home sales have slowed in recent months.
We can expect more of the same for the third quarter, according to the report, except there will be a modest rise in housing starts, helping to ease inventory constraints.
The GSE predicts that total home sales (new and existing) will reach 6.14 million this year, an increase of only 0.2% compared with 2017.
Yet home price growth is anticipated to rise 6.0%.
The report explains that while prices are expected to moderate, they will still rise at a pace well above inflation.
“The housing market hit some speed bumps this summer, with many prospective homebuyers slowed by not enough moderately-priced homes for sale and higher home prices and mortgage rates,” explains Sam Khater, chief economist for Freddie Mac. “These challenges were predominantly seen in expensive markets out West, where demand and sales are beginning to dampen because of weakening affordability.”
The supply and demand problems are particularly prevalent in the markets in the West, the report finds. These conditions will likely weaken affordability for the rest of the year, suppressing home sales.
Mortgage lenders, of course, will take a hit this year as a result of the slowdown in home sales. According to the report, the drop in purchases, as well as the drop in refinances resulting from higher rates, means mortgage lenders will see single-family first-lien mortgage originations decrease by about 8% this year to $1.66 trillion.
“The good news is that the economy and labor market are very healthy right now, and mortgage rates, after surging earlier this year, have stabilized in recent months,” Khater says. “These factors should continue to create solid buyer demand, and ultimately an uptick in sales, in most parts of the country in the months ahead.”
Currently, Freddie Mac is forecasting that the U.S. economy will grow 2.8% in the third quarter and 2.7% for the year.