Photo: Robert Clark
Rising interest rates and home prices are likely to deter some would-be homebuyers, fueling the demand for rental units.
“The central storylines in the U.S. housing market didn’t change much over the past few years, but a series of emerging trends are setting up a much different narrative for 2019,” said Aaron Terrazas, Zillow senior economist, in a statement.
Zillow expects the 30-year fixed mortgage hit 5.8 percent by December 2019. The current rate is 4.75 percent.
Mortgage rates rose by about 100 basis points since January 2018, and they are expected to continue to grow steadily through 2019 — ending 2019 just under 6 percent.
“This will be the highest rates have been since the last recession, although still below the historic average at times of strong economic growth,” reads the Zillow report.
The rise in interest rates will put “a pinch on affordability, particularly in already expensive markets,” and off-set the anticipated moderate home price appreciation.
In 2019, home price growth will continue to slow, with Realtor.com forecasting an annual increase of just 2.2 percent. US home prices have been rising steadily over the last couple of years but at a slower pace.
“Rising mortgage rates and prices will keep a lot of new inventory out of their budget and make it especially tough for first time home buyers,” reads the Realtor.com report.
Inventory, which has been at crisis levels since the housing bust as new construction lags, will increase at a moderate level, posting a 7 percent annual increase. Although the number of homes for sale is increasing, which is an improvement for buyers, the majority of new inventory is focused in the mid-to-higher-end price tier, not entry-level where product is needed the most.
But Realtor.com expects that many high-priced markets will “buck the trend” by posting double-digit inventory gains.
“Inventory will continue to increase next year, but unless there is a major shift in the economic trajectory, we don’t expect a buyer’s market on the horizon within the next five years,” said Danielle Hale, chief economist for Realtor.com, in a statement.
Rent growth is expected to accelerate in 2019 as potential buyers are priced out of the for-sale market by rising mortgage rates turn to the rental market. The recent slowdown in rent appreciation will reverse because of additional demand from spurred buyers.
“Higher interest rates limit what people can afford to pay, and those who are financially stretched but considering buying a home may decide to continue renting,” reads the Zillow report.
Buyers who are able to ride it out will find less competition and fewer bidding wars as more buyers are priced out by rising interest rates. But Realtor.com cautions that some buyers may feel “an increased sense of urgency to close before it gets even more expensive.”
“Unfortunately for buyers, it’s only going to get more costly to buy, especially the most-demanded entry level real estate. To be successful, buyers should think through how they’ll adapt to higher rates and prices,” says Hale.
Meanwhile, the challenging market conditions are expected to have a negative impact on the total number of homes sold as sales continue to soften. Realtor.com predicts a 2 percent year-over-year decline in home sales in 2019.