Unlike previous housing cycles, lower mortgage rates are not expected to meaningfully boost home sales, nor will they significantly boost new home construction, Fitch Ratings forecasts.
For now, lower mortgages rates are merely serving to stabilize the housing market, the firm says in a report.
“Affordability issues driven by price appreciation continue to constrain the housing market, with rising input costs for homebuilders further exacerbated by tariff considerations,” the firm writes in the report.
Currently, Fitch is predicting that housing starts will increase 1% and new home sales will increase 2% this year, however, existing-home sales are forecast to “decline modestly,” due to lack of inventory.
The good news is that homebuilders are starting to build smaller, more affordable homes.
“Builders have responded to the inventory shortfall by building more affordable homes to meet demand, which would also put downward pressure on prices due to mix shift,” the firm says.
Another positive development is that home price appreciation is slowing, which should help improve affordability. Fitch is forecasting that U.S. home prices will rise 2% to 3% this year, which is down considerably from the average annual home price appreciation rate of 6% seen during the 2012-2018 period.
“Homebuilders that have recently shifted their focus to more affordable products saw the most improvement in net orders,” Fitch writes in the report. “Meritage Homes Corp. and MDC Holdings reported net order absorption growth of 19 percent and 12 percent, respectively, driven by affordable product offerings. Conversely, Toll Brothers, a luxury home builder, reported a 3.2 percent decline in net orders during its most recent quarter, including weak activity in California.”
Fitch points out that although mortgage rates are low, lenders might not see a corresponding rise in refinances – at least, not at the levels they have seen in the past.
The firm points out that today’s rates “are not meaningfully lower than the rates seen in 2017, and are still higher than the lows of 2016.”
“The 30-year mortgage hasn’t moved very much despite the relative volatility of the 10-year, and many households that would be considering refinancing may have done so over the past few years,” the firm says.
What’s more, some mortgage lenders may lack the staffing and capacity to handle an influx of applications for refinances because, six months ago or so, they were expecting interest rates to increase.