February 3, 2020
Orion’s brokers are noticing that buying conditions are enticing more renters to become homeowners. The homeownership rate rose to end 2019, with the number of homeowners increasing and renter households declining slightly. The homeownership rate for those under the age of 35 saw the largest uptick. But with the current business expansion well into its 11th year and facing heightened geopolitical risks, economic forecasts for 2020 are generally erring on the side of caution. For lenders, the Wuhan coronavirus and heightened tensions in the Middle East will likely keep long-term interest rates, and mortgage rates, a little lower than they would otherwise be. Orion’s management wonders if housing will continue to be a bright spot.
While affordability remains challenging for many first-time buyers, nearly every key driver of home sales and new construction remains solidly positive. Job and income growth continue to be solid, and consumer confidence remains high. Interest rates remain low and credit is readily available. Our brokers report that builders are increasingly looking to develop more product for first-time homebuyers, and public policy is turning toward easing development burdens.
The most recent housing data is encouraging. The most recent NAHB index, a measure of sentiment among single-family homebuilders, registered the highest reading since 1999. And new home sales beginning 2020 at a pace running ahead of last year’s overall sales. Sales of existing homes rose less in 2019 than in 2018, though sales over the last five months of the year ran ahead of 2018 pace, beginning 2020 with strong momentum. Sales have been limited by extremely low inventories, particularly of homes priced at or below the median, a persistent problem throughout this business cycle. Younger households are expected to continue to remain in apartments for longer than previous generations, showing a greater preference for urban living. Orion’s brokers believe that millennials have to age into buying homes and not renting.
The South and West, together accounting for 85 percent of all new home sales, should continue to get the most attention from builders who are increasingly looking to pivot to more affordable regions of the country. Much of the improvement in sales has been in the South, where home prices remain relatively moderate. At a time where fewer people are moving within the United States, more of those that are moving are headed to major metropolitan areas in the South, which has seen its share of new home sales and single-family starts surge relative to the rest of the country. The shift in home buying toward the South, where the median home price of a new home is nearly 10 percent below the national median, is one of the reasons that new home prices have moderated so much during the past year. Nationwide, single-family starts have risen in five of the past six months and single-family permits have risen for seven consecutive months.
Wages are rising faster than home prices recently, which is a departure from the rest of this economic expansion and a good thing for housing. If this trend continues, it should prevent affordability conditions from deteriorating further and help boost affordability for some. Also aiding affordability, low mortgage rates continue to lift nearly every facet of the housing market and aid homebuilding in gradually returning to its historic norms relative to population and household growth. With mortgage rates remaining low, already dropping to multi-year lows in 2020, home sales and new home construction have both reversed 2018’s slide and now appear to be solidly on a path to higher ground.
Our brokers don’t expect lower rates to turbocharge the housing market like it has in earlier decades. The demand for housing should remain high, keeping the housing industry as a strong point of the overall U.S. economy.