Well, the initial reports are now complete for September, and we can see that the strong first half of the year for housing did not lose momentum as the kids went back to school and temperatures cooled.
The market is strong and seems poised to remain so for the rest of the year. However, the improving economy presents both opportunities and challenges for the months ahead.
Total home sales for this year through September are up 4% over the same period in 2015. Existing-home sales are up 3%, while new-home sales are up 13%.
The new-home market is gaining momentum as the existing-home market struggles with very low levels of inventory. As a result, new homes represent 10% of home sales now; a year ago, they represented only 8%.
And there’s more growth ahead for new homes. That’s because new construction is the “inventory pressure escape valve” when jobs and households are growing, yet other factors constrain existing-home inventories.
Tight supply combined with strong and growing demand continue to provide support for stronger-than-normal price appreciation. Median existing-home prices were up 6% over last year in September.
The housing market outperformed the U.S. economy in the first half of the year, as growth in sales and prices was stronger than the growth in GDP. Likewise, employment gains have been bumpy so far this year, as sectors of the economy continue to be plagued by the strong dollar and the low price of oil.
Housing outperformed because of ample demand from buyers who haven’t yet been successful—buyers who just happen to be from the two largest generations in American history. Millennials and baby boomers are now reaching turning points in their lives (marriage, retirement) that push them to make housing decisions that they have been putting off for many years.
We clearly see the impact of those demographic tailwinds in the recently released 2016 Profile of Home Buyers and Sellers from the National Association of Realtors®. The older millennials (aged 25 to 34) represent the biggest buying age demographic. As a result, we’re finally seeing gains in the share of first-time buyers.
Now the U.S. economy appears to be on stronger footing, posting the strongest GDP growth in the third quarter than we have seen in two years.
So what’s coming down the road?
With a more positive outlook domestically and with less concern about negative interest rates continuing abroad, the Federal Reserve is looking like it will raise short-term interest rates at the December meeting.
While short-term rate policy does not affect mortgage rates directly, the mortgage market often moves ahead of policy changes. And that’s what we’re now seeing with mortgage rates, which are currently where they were before the Brexit vote in June.
Buyers and refinancers enjoyed a summer of love for low mortgage rates, as the average 30-year conforming rate remained near all-time lows. But now average 30-year rates are about 15 basis points higher. (A basis point is 0.01%.)
While mortgage rates are likely to be on the move up, they are not likely to move up dramatically. U.S. economic growth remains tepid by historical standards, and low rates globally will prevent the Fed from being too aggressive.
Marginally higher rates present both a challenge and an opportunity. The challenge is straightforward. An increase of 10 basis points in the rate on a mortgage will increase the monthly payment by 1.2%.
The opportunity comes in the behavior of lenders and investors who will likely be more aggressive in the purchase mortgage market with the chance to make more money from higher rates. Lenders will also see diminishing prospects in the refinance market, further pushing them to be more aggressive in the purchase market.
Once the presidential election is (finally!) behind us in less than a week, consumer confidence should rebound from its recent decline. A stronger consumer outlook on top of historically high numbers of people turning 30 as well as 65 will provide the support for continued gains in the months ahead.
The key challenges will be continuing low levels of available homes for sale combined with navigating marginally higher mortgage rates.