Photo: Robert Clark

Prospective US homebuyers will see further erosion of housing affordability in 2019 as interest rates climb to a decade high, according to the latest market predictions from Dr. Frank Nothaft, CoreLogic chief economist.

Despite a growing economy and slowing price growth, some prospective buyers may be priced out by rising interest rates and forgo their buying plans altogether.

These are the top 3 trends that will have the greatest impact on the overall housing market in 2019:

1. Economic growth

By most markers, the US economy is booming, driven in part by strong expansion and a thriving jobs market.

In fact, economic growth just needs to last seven more months to set the record for the longest expansion in US history, based on business cycle dates going back more than 160 years. Previously, the longest trough-to-peak cycle to date was the March 1991 to March 2001 economic expansion.

CoreLogic expects economic growth will be about 2.4 percent during 2019, a bit slower than the 3.1 percent we expect for 2018. Nothaft says that this still “should be” sufficient to push the unemployment rate to around 3.4 percent — the lowest unemployment rate in 50 years.

A low unemployment rate is good news for prospective buyers who may be searching for better paying jobs before they buy, but the expanding economy is not.

2. Interest rates

The thriving economy and jobs market will likely continue to push interest rates upward.

CoreLogic anticipates 30-year fixed mortgage rates will shoot up to an average of about 5.25 percent by December 2019 — the highest level in a decade. Interest rates last hovered around 5 percent in April of 2011 in the wake of the housing bust.

Rising interest rates have kept some Millennials out of the for-sale market. As affordability worsens, they’re choosing to stay renters, which is keeping the homeownership rate well below historic norms.

While we expect home price growth to slow to 4.8 percent annually in October 2019, adding in the expected rise in mortgage rates indicate the mortgage payments homebuyers will face by then will have risen by more than 11 percent. This is a larger increase than is expected for income, and thus affordability will likely deteriorate further,” Nothaft tells Livabl.

And while older buyers can recall a period when rates were higher, for Millennials a rate of 5.25 percent will be the highest of their lifetime.

“It’s really about perspective. When I was a first-time buyer, rates were over 10 percent. Millennials need to make a tenure choice. Do they want to buy or do they want to rent,” says Nothaft.

3. Home prices

Higher interest rates will have an immediate impact on housing and mortgage market activity.  

Homeowners who currently have low-rate mortgages will be incented to stay in their home rather than sell, keeping the new-listings flow relatively low.

“The larger monthly payments that come with higher mortgage rates will likely soften buyer demand, leading to less upward pressure on home prices,” says Nothaft.

Over the next year, CoreLogic forecasts price growth to slow by one percentage point to around 4.8 percent.

Nothaft says that the minimal decrease may not be enough to turn some renters into buyers as long as single-family home rents continue to be lower and more stable than home prices and interest rates.

Potential first-time buyers may decide to forego a purchase at this time, continuing to rent, and thus rental demand will continue to be strong, keeping rental vacancy rates low in most markets,” says Nothaft.

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