A strong job market, increased real wages, and historically low mortgage rates should support a solid housing market in 2020, most economists predict.
Believe it or not, the problem will be finding enough homes for buyers, as housing inventory is near all-time lows throughout much of the country.
With low unemployment and interest rates well below historical averages, the real estate industry is being constrained by shortage in housing availability, especially at lower price ranges. Not enough homes are being built, and homeowners are staying put longer, creating a bit of a bottleneck.
With that said, most experts believe it will be a good year for home buyers – and even better for home sellers.
Let’s take a look at what the insiders are saying about housing, the Federal Reserve, and mortgage interest rates in 2020….
“The housing market appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years, further bolstering our modest-but-solid growth forecasts through 2021,” said Doug Duncan, Fannie Mae’s chief economist. “In our view, residential fixed investment is likely to benefit from ongoing strength in the labor markets and consumer spending, in addition to the low interest rate environment.”
Current research shows that housing has actually become more affordable this year, despite home appreciation and tight inventory. Affordable homes are possible thanks to lower mortgage rates and greater purchasing power.
For the average home buyer, month-to-month housing costs are lower than they’ve been at almost any point in the last three years because real wages are up and interest rates are down.
You can find out some specifics about housing affordability here….
The trade association for real estate agents predicts moderate growth in the housing market and continued low mortgage rates.
They believe that new-home sales are expected to rise to 750,000, an 11 percent increase that puts them at a 13-year high. Existing-home sales will continue to be held down by lack of supply, rising modestly to 5.6 million, a 4 percent increase.
The national median sale price of an existing home is expected to grow to $270,400, an increase of 4.3 percent from 2019.
Here’s what CoreLogic sees regarding appreciation for 2020:
Rents are rising and will likely continue to accelerate in 2020, according to the latest market report from Zillow.
Apartment rents grew 2.3% year-over-year, driving the median U.S. rent up to $1,600 per month. At the same time, housing values showed the lowest growth since February 2013, and inventory of for-sale homes fell.
With fewer homes on the market, national rent growth is projected to rise in 2020.
Single-family rents rose 2.9% year over year, according to CoreLogic’s Single-Family Rent Index, which measures rent changes among single-family rental homes, including condos.
As you might expect, now is not good time to be a renter, especially when you consider the missed opportunity on home appreciation.
Historically Low Inventory
According to the 2020 National Housing Forecast from Realtor.com, the national housing shortage will continue in 2020, possibly reaching historic low levels.
The graphic below shows where inventory is today relative to other times over the last 35 years:
“The market is still years away from reaching an adequate supply of homes to meet today’s demand from buyers,” Realtor.com’s senior economist George Ratiu says. “Despite improvements to new construction and short waves of sellers, next year will once again fail to bring a solution to the inventory shortage.”
THE FEDERAL RESERVE
Many consumers believe that the Federal Reserve sets mortgage interest rates. Interestingly, that’s not the case….the Fed doesn’t make mortgage rates, they are driven by the bond market market on Wall Street.
The Federal Reserve surely influences mortgage rates, but they don’t set them. You can find out more on that here…
For the Federal Reserve, manipulating the Federal Funds Rate is one way to manage its dual-charter of fostering maximum employment and maintaining stable prices. So, when the Fed lowers or raises the Fed Funds Rate, interest rate markets generally move in that direction.
Quantitative Easing and Interest Rate Manipulation
The Federal Reserve started re-purchasing Treasury Bonds in September of 2019, something which they have not done since 2017.
Blogger Craig Eyermann does a fantastic job of defining Quantitative easing: “(QE) is an extraordinary monetary policy that the Federal Reserve implemented during the Great Recession to stimulate the economy after it had cut interest rates to zero percent by purchasing government-issued debt securities, such as U.S. Treasury bills and bonds, to get the effect of additional cuts to interest rates. As a result of its QE policies, the Federal Reserve became one of the largest single creditors to the U.S. government at a time when the size of the national debt was surging.”
What many experts generally agree upon is that the Fed has utilized QE to keep interest rates low, especially considering they lowered the Federal Funds rate 3 times in 2019.
What all of this means is that, essentially, the Fed is trying to maintain a relatively low interest rate environment…which should be good for mortgage rates in general.
Voting Membership Changes
The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
This year, there are four presidents rotating out that voted in 2019: Boston (Eric Rosengren), Chicago (Charles Evans), KC (Esther George), St Louis (James Bullard).
The new four presidents that are rotating in for 2020 are: Cleveland (Loretta Mester), Philly (Patrick Harker), Dallas (Robert Kaplan), Minneapolis (Neel Kashkari).
The make up of the 2020 Fed is a bit different that 2019, as three of the new members are generally in favor of lower interest rates, and only one (Mester) has been open about raising the Federal Funds rate.
Most experts agree that this board will opt for lower rates than previous administrations.
MORTGAGE INTEREST RATES
The average rate on the 30-year fixed mortgage is hovering in the low 4% range as we enter 2020, a full percentage point lower than where it was a year ago. Low rates are boosting already strong demographic demand drivers in the market.
Many prognosticators are stating the average fixed rate might well fall into the mid 3% range in 2020. That would be the lowest annual average ever recorded in Freddie Mac records going back to 1973.
Why are lower rates expected? Let’s take a look…
Reasonably Low Inflation
As stated earlier, mortgage rates are set by bond investors who keep a watch on inflation as a gauge of the yields they are willing to take. Rising inflation eats into their returns and leads to higher mortgage rates. In a low-inflation environment, like today, they can still make money while taking low yields, which translates into low rates for borrowers.
Inflation has been extremely low over the last year and a half – and most experts (including those that sit on the Federal Reserve Board) are not seeing many new inflationary indicators, either.
This means that interest rates should stay low, unless inflation rears its ugly head.
Many, like me, were predicting a recession in 2019 , but it never really emerged. Unemployment stayed low and corporate profits continued to rise.
With that said, a recession at end of 2020 still possible, but may be delayed into 2021 due to some financial engineering by the Federal Reserve.
A couple of things to keep in mind…
- Manufacturing already struggling
- Shipments have been declining
- Yield curve was inverted earlier this year (this inversion has happened before every single recession on record)
The key metrics to watch will be an uptick in initial jobless claims and the overall unemployment rate
When recession eventually comes, rates will significantly decline.
Stocks – Longest Expansion in History
The U.S. is officially in its longest expansion, breaking the record of 120 months of economic growth from March 1991 to March 2001, according to the National Bureau of Economic Research.
The economy has been on a growth spurt since June 2009 and now surpasses the previous record expansion set between March 1991 and March 2001 before the dot-com bubble burst.
The decade-long expansion has been fueled by job growth, record-low unemployment rates and low interest rates.
There were 21.4 million jobs created during the expansion after a loss of 9 million during the recession.
Overall household wealth — which includes home values, stock portfolios and bank accounts minus mortgages and credit-card debt — spiked 80 percent over the last decade.
At the same time, some experts worry that a recession is on the horizon as history suggests that expansion can’t continue forever. Other causes for concern are the US-China trade and tariff dispute and a sluggish global economy.
“It’s unusual to have gone so long without a recession” when looking at the economic data going back to the 1950s, said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
As mentioned previously, if there is a recession, rates will most definitely come down even more.
2020 looks to be a positive one for both buyers and sellers, although the market would clearly be considered a “seller’s market”, because inventory is so low.
However, because real wages are up, home affordability is up, and interest rates are forecasted to remain low, buyers are in a great position to purchase. It just might take a little more negotiations to agree upon the purchase price!
In reality, now is a fantastic time to purchase. Contact me for more information, as it would by my privilege to help you.