The economic environment for housing in 2017 was quite favorable and housing markets responded positively, having their best year in a decade. Incomes were up and job growth was strong. Mortgage rates remained low, falling for much of the year. Home sales through October were on track for the highest total in a decade, housing construction picked up, albeit slowly, and home price appreciation remained robust. And all those Millennials we have been hearing so much about? They finally started to move markets, forming households and buying homes at increasing rates.
Earlier this year, the U.S. Census Bureau reported that U.S. median household income increased for the second year in a row to over $59,000 1in 2016. Income growth carried over into 2017. Real Gross Domestic Product has averaged 2.5 percent growth over the first three quarters of 2017. Economic growth in this expansion has been weak relative to prior expansions, but we have seen growth averaging about 2 percent a year since 2012.
While overall economic growth has been modest, job gains have been strong. The U.S. labor market has had positive month-over-month job growth for 86 consecutive months, the longest streak in post-war history. Job growth has helped to push the unemployment rate to 4.1 percent, the lowest level since December 2000.
Despite the low unemployment rate, consumer price inflation remains subdued. Headline inflation has averaged about 1 percent over the past three years. Low consumer price inflation helps consumers by supporting purchasing power, but it also has another key impact on the housing market; it helps to keep mortgage rates low.
And mortgage rates are indeed low. In our Primary Mortgage Market Survey, U.S. weekly average 30-year fixed mortgage rates peaked at 4.3 percent in March, but then trended down, falling below 4 percent since May and standing at 3.94 percent as of December 11, 2017. Low rates help support homebuyer affordability. For example, the decline in rates from March to December saved a typical homebuyer about $600 a year in mortgage payments2.
These positive economic factors have helped to support housing demand. Despite being weighed down by low levels of available for-sale inventory, home sales are on pace for their highest total in a decade. Part of the reason for a lack of inventory is a slow recovery in new home construction, but single-family construction is grinding higher. A steady improvement in new home construction will be key to restoring balance to housing markets.
Tight supply conditions have contributed to rapid house price appreciation. Per our own Freddie Mac House Price Index, home prices increased 6.8 percent nationally over the 12 months ending September 2017. The increase in home prices led us and many others to ask: Are we in another house price bubble? Spoiler alert: no, not now, but read on to find out what we should be looking at going forward.
Despite growing affordability challenges, young adults have started to move the mortgage market. The homeownership rate for households under 35 years of age increased 1.4 percentage points from the third quarter of 2016 to the third quarter of 2017. With a population of over 70 million, even modest increases in the rates of homeownership by the Millennial generation will have a big impact on the housing market. The total number of first-time homebuyers through the first three quarters of 2017 was 1.6 million, up 8 percent from the same period last year per a report by Genworth.
I’m proud to say that Freddie Mac helped 349,000 of those first-time homebuyers in 2017, thanks to innovative solutions like our Home Possible® mortgages and our willingness to continually innovate and engage in smart risk taking.
It’s unlikely the economic environment will be much more favorable for housing and mortgage markets next year. Income growth should remain positive, but not enough to offset the other factors affecting homebuyer affordability. We’re expecting that interest rates will remain low, but gradually move higher. Housing construction should gradually pick up, helping to supply more homes to inventory-starved markets. More housing supply and modestly higher rates will lead to a moderation in house price growth.
One wild card is tax policy. Changes to tax policy have the potential to shift the trajectory of housing markets. The size of the impact that these changes will have is up for debate. Estimates from different analysts show a large variation in estimated impact, based on assumptions about which provisions will be enacted and how the economy will respond. National Association of Home Builders CEO Jerry Howard said that the proposed tax plan would lead to a drop in house prices and could lead to a housing recession. Yale economics professor and Nobel laureate Robert Shiller believes that the plan won’t have a large impact.
If the tax bill increases the deficit, inflation expectations may rise and put pressure on long-term interest rates including mortgage rates. A large increase in mortgage rates would significantly dampen housing market activity. On the other hand, increased after-tax income for some households may support consumption spending, and reduced corporate taxes may drive private investment spending higher. The resulting increases in incomes and Real GDP may partially or even completely offset the negative impact of higher mortgage rates. At this point it’s hard to say exactly what the total impact on housing markets will be. What we can feel confident about is that housing affordability will be a growing challenge in 2018 and beyond. With limited supply and a large, growing, young adult population entering peak homebuying years, competition in the year to come will be fierce.
1 See the U.S. Census for a careful look at whether this was the highest ever level: https://www.census.gov/newsroom/blogs/random-samplings/2017/09/was_median_household.html. For more on the longer-term median earnings over the past 40 years, see https://www.census.gov/newsroom/blogs/random-samplings/2017/09/median_earnings_over.html.
2 Assumes a $250,000 30-year fixed mortgage, principal and interest payments only.
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