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Residential Department: BackSpace: December 2018



The housing market is buttressed by a ‘Goldilocks’ economy

As the end-of-the-year holiday season approaches, it is a traditional time to take a look back at the year behind us, as well as a look ahead at the year to come. With respect to the nation’s housing market, that tradition of planting one foot in the past and one in the future offers us a glimpse of some good news and some not-so-good news.

For the mortgage market, 2018 and the year ahead, 2019, will be defined by some broad strokes that include the following buckets: home sales, home prices interest rates, loan quality and housing affordability. Those dynamics are in constant motion and in combination define the good and the bad of the market.

For 2018, those variables, according to several economists, have played out to create a market that was quite favorable for homeowners — and not so favorable for homebuyers.

“This year appears to be another good year for homeowners, with home values still rising quite strongly,” says Lawrence Yun, chief economist for the National Association of Realtors. “The high point is that property owners are continuing to accumulate wealth. The low points are that housing-inventory levels remain very low, which is causing difficulty for first-time homebuyers … and second, because of the low inventory, prices are becoming unaffordable.”

Economist Ray Perryman, president and CEO of The Perryman Group, echoes Yun’s analysis of 2018, saying rising prices and shrinking housing supply, along with an upward movement in interest rates, has resulted in affordability “clearly becoming an issue.”

Perryman adds that another point of pressure in a housing market that has “seen a fairly dramatic recovery in recent years” is the movement of people to cities with hot job markets.

“In areas such as Texas, the economy has been good for a while,” he says, “but the influx of new residents [from areas with softer job markets] has put notable [demand] pressure on housing markets, with a recent ranking placing San Antonio and Austin among the most overpriced housing markets in the nation — meaning that prices have risen faster than incomes.”

Freddie Mac Chief Economist Sam Khater points out that the nation’s housing market began to stumble a bit starting in late 2017, when home sales began to plateau, “and it’s been that way ever since.” Khater adds that by late summer 2018, purchase-mortgage application activity, “appeared to be growing again, but at very small year-over-year growth rates of 1 percent to 1.5 percent.”

What I worry about is a recession coming in while underwriting continues to loosen and the market remains unaffordable.

He adds that home-price growth also decelerated in 2018, compared with the prior year — although it’s still growing on an annualized basis “in the range of 3.5 percent to 4 percent.”

“That’s because the market is so tight, even a marginal softening in demand is not going to lead to a big price drop. It will just soften home prices,” Khater says. “But mortgage performance continues to be pristine. On a vintage basis, when you look at thepost-2010 [home-mortgage] vintages, they’re the best-performing vintages we’ve seen in 20 years or more.”

As we move forward into 2019, the interplay of market forces in the housing industry appears to be tipping slightly in favor of homebuyers on the affordability front, although the market overall still faces some strong headwinds that could be a drag on home-sales growth.

“With the economic improvement now more widespread, fewer people are moving to try to find work, and I expect the situation to continue to normalize over time,” Perryman says. That trend, he adds, should help to alleviate some pressure on housing affordability. Working against that, however, is the nation’s continuing draconian immigration policies, Perryman stresses.

“One factor which is going to affect the housing market [and housing supply] is the shortage of labor many construction firms are dealing with,” he says. “Immigrants are an important element of the workforce across the economy, but particularly in construction and a few other industries.

“This situation is particularly acute in high-growth states, such as California, Florida and especially Texas. Addressing immigration issues is important to virtually all industries, with housing topping the list.”

If that issue can be worked out, Perryman adds, and assuming the solid job growth continues, which promotes strong housing demand, “it should be good news for real estate markets” going forward.

Yun expects the economy to continue to be good in 2019, hopefully with wages ticking upward, helping to overcome any headwinds from rising rates. He adds that “more inventory will be showing up in the market, with the worst of the shortage over, and that will help to moderate home-price growth, which will be good for buyers.”

Still, Yun says it is likely high-priced coastal areas will continue to face affordability challenges in the year ahead, however. “Overall, in 2019, things should be more normal compared to 2018, when it was clearly a sellers’ market with low inventory,” Yun adds.

Khater points out that refinances as a percentage of all originations are now at the lowest level “in 18 years, so originators are hungry for volume, and where else are you going to get it except for diving down the [risk] spectrum on the purchase side.” He says even though loan performance is now doing well, it really has nowhere to go but down.

“What I worry about is a recession coming in while underwriting continues to loosen and the market remains unaffordable,” Khater adds. “I don’t envision a 2007-type [housing-crisis] scenario at all, but it could cause the market to slow down a fair amount.”

With that said, Khater stresses that we are now in a “Goldilocks scenario,” adding that “things really can’t get any better” with the economy.

“Over the shorter term, the next six to 12 months, the economy looks great,” he says. “The question is what happens in the sort of intermediate term.

“But there’s a long tailwind to the residential home-sales market as well, because you have millennials, who are … going to be driving home sales, and first-time homebuyer growth particularly, for the next eight to 10 years. So, we have a nice demographic tailwind, irrespective of what’s happening in the economy.”


Bill Conroy is editor in chief of Scotsman Guide Media. Reach him at (800) 297-6061 or

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