Much has been written about the impact of rising rates on mortgage volume but, more importantly, housing. To help think about the next year I would suggest we consider some of the facts about the market today. This starts with us focusing on just a few key variables that will likely be positive for all housing demand rental and owned. Please remember that the economy always has risk and uncertainty, but these variables are fact based and important elements for consideration as we look into the next year:
Perspective: While rates are rising from their lows, they will remain at the very low end when compared to a decades long historical look at 30 fixed rate mortgages. To highlight this, take a look at this historical perspective of Freddie Mac’s 30 year fixed rates going back to the 1970’s as tracked by the St Louis Federal Reserve. As you will see below, rates in the 4%-5% range still pose great opportunity for home buying when you compare to any historical perspective. In fact, looking at history, one could argue that rates have more risk of rising than declining, especially in this growing economy. My assumption – borrowing now is still a bargain and will remain so for this next year.
Demographics: As PEW Research showed in their April, 2016 release (Millennial overtake baby boomers) the Millenial generation is now larger than the baby boom generation and significantly larger than Gen X which created a more sluggish interlude between the two larger generations. The point here is this massive generation is here now and will dominate housing demand, new job formation, and spending in this country for the next couple of decades. Just look at this simple chart from Pew. Looking out to 2050, this younger generation will create a consistent demand for housing units, both rented and owned.
Homebuying sentiment: As many economists have proven through good research, Millenials want to own at some point. As an example, look at this research from Fannie Mae on homeownership sentiment for millenials. As of this survey in 2014, in an economy not as strong as 2016, 90% of young renters want to own at some point:
Conclusion? Low rates in historical terms, impacts on housing demand by the largest generation in history, and a desire to own, are all data points that lead to forecasts by the MBA and others for continued home purchase mortgage demand for the next decade, growing at a steady pace. MBA forecasts mortgage purchase volume growing from approximately $990 bb in 2016 to $1,245bb in 2019. Likewise we forecast annual appreciation at steady rate between approximately 5% – 3.5% each year.
The greatest element to all of this is that this demand cycle for housing will be built in a world of qualified mortgages; fully documented, sustainable homebuyers, will be completely unlike the housing bubble of a decade ago which was built on many unsustainable programs. This foundation should help comfort consumers considering homeownership that they are not buying into an irrational market. This cycle ahead starts with a strong, credible, foundation and simply good demographics. As a matter of fact, one of our greater concerns will be access to credit for entry level buyers and availability of affordable first time homebuyer housing stock, and affordable rental housing near key employment markets and mass transit, but that is for another discussion.
Some thoughts to consider as you look ahead to 2017. Happy Holidays!!