Housing cycles are generally very long, with upward trends often lasting years or even decades, but in some respects 2019 was an exception to the norm.
What a difference a year can sometimes make.
Consider that a year ago at this time, the average rate for a 30-year fixed-rate mortgage nearly 100 basis points higher, and there were reports that homeowners were “rate-locked” in their homes, contributing to stagnation in existing-home sales.
But starting in February, mortgage rates began to drop, and home sales – both existing and new – started to rebound. The trend of rising purchase volume continued through the remainder of 2019, propelled also by an improving job market and rising wages.
The only factor that held home sales back was limited supply – a trend which carried over from 2018 and continues today. Despite this constraint, year-over-year existing-home sales were up 2.7% in November, 4.6% in October and 3.8% in September, according to the National Association of Realtors.
More dramatic annual gains were realized for new home sales, which were up 16.9% in November, 31.6% in October and 15.5% in September, according to estimates from the U.S. Census Bureau and U.S. Department of Housing and Urban Development.
However, both existing and new home sales would have been much better were it not for the pesky problem of limited inventory.
Still, the change that has occurred between the fourth quarter of 2018 and the fourth quarter of this year has been dramatic.
“The most notable thing is what has happened to mortgage rates,” says Mark Palim, deputy chief economist and vice president for Fannie Mae, in a recent interview with MortgageOrb. “If you look at the average rate in 2018 versus 2019, it’s down about 100 basis points. And from the peak last November, it’s down 140 basis points.”
“The housing market was very weak in the second half of 2018, in terms of home sales and housing starts – although home price appreciation was still pretty strong,” Palim adds. “Now we see a year later that those dynamics have changed.”
Even the problem of limited inventory appears to be improving, as home builders have recently ramped up production: Housing starts increased an impressive 13.6% in November compared with a year earlier, and were up annually 8.5% in October and 1.6% in September.
Perhaps even more encouraging is the fact that “the average square footage of a new house is no longer rising – it’s actually declining,” Palim says.
He adds that although home prices continue to rise, “the cost to the consumer per square foot is actually on-trend; what the builders have done, in order to build at a price point where first-time home buyers and low- to moderate-income buyers can buy, is shrink the size of the house.”
“We have not seen a big pick-up [in this trend] in the condo market, but we have seen it in townhouses,” he continues. “It’s a way to make the price points work. Hand-in-hand with that, we have seen the most weakness at the higher-end of the market. If you look across the metros, it’s the most expensive tier of homes where you see the least home price appreciation, and where you see the supply going up.”
So what are the main factors holding home builders back? Is it a lack of buildable lots? More stringent local regulations? The cost of materials? Lack of labor?
“It’s all of the above,” Palim says. “When you talk with builders – which we do – you hear that labor is still a big issue. They’re having a hard time finding skilled workers. The builders have tried to do things to improve that – by offering training programs, etc. – but it is a pipeline that needs to be rebuilt.
“Materials seems to be a little bit less of an issue – in terms of price,” he says. “Although we had some concerns around tariffs and lumber prices, that has lessened this year.”
In addition, zoning laws and building codes “are always in the background as an issue,” he adds. “They’re driving up the cost. That’s a factor that comes up repeatedly.”
Palim points out that the National Association of Home Builders “has data showing what portion of the cost of a [new] house is due to regulation – and that has clearly increased over time.” He further adds that this is a problem “that every level of government is focused on. It has gotten national attention.”
“When we look at our data, we see that in places where there is more restrictive zoning, the cost of the housing is higher – and what that leads to is the need for a much larger downpayment,” he says. “When you look at the homeownership rate across the country, you see that the highest levels are in the Midwest, where the home prices are the lowest.”
In terms of what the solutions are, “it has to come from every level of government. There are things that are likely federal – in terms of environmental impact studies and the builders bring up issues with wetlands – but most of it is at the state and local level.”
Despite the challenge of lack of inventory, low mortgage rates, a greatly improved job market and, especially, rising wages resulted in “a pretty good pick-up” in existing and new home sales in 2019.
“We’ve seen a really good pick-up in new home sales – and pretty good pick up in existing home sales,” Palim says. “We’re not yet exceeding the levels seen in 2017, but new home sales are continuing to rise, making a ‘V’ shape, if you look at it over the past four quarters.”
Low mortgage rates are perhaps the biggest factor that propelled increased home sales this year.
“If you look at our Home Purchase Sentiment Index, rates are the main thing that really moved positive, in terms of sentiment among consumers,” he says. “They really responded to that.”
“Really the only thing that is holding back home sales right now is availability,” he says. “The inventory of available homes is still quite low – especially in the major metros.”
However, we can expect to see that change in 2020, according to Fannie Mae’s most recent economic forecast.
Of course, this stronger housing market bodes well for mortgage lenders. As of early December, the Mortgage Bankers Association was forecasting that mortgage origination volume would increase to $2.068 trillion in 2019, up from $1.677 trillion in 2018.
This includes an estimated $1.272 trillion in purchase volume – up from $1.209 trillion in 2018 – and an estimated $796 billion in refinance volume, up significantly from $467 billion last year.
