Home market softens as mortgage rates rise
Even as mortgage rates climb in the coming years, they are likely to remain historically low. But that won’t matter to many homeowners who might be considering buying new digs.
“If you already have a perfectly good home that’s on a 30-year, 3.2 percent mortgage, that makes it tough to move up,” Lawrence Dean, regional director of Metrostudy, said Thursday during a market briefing to builders. “And move up is what we always, as an industry, want people to do.”
Dean cited rising rates as one of the reasons builders are reporting slightly slower sales and traffic to the consulting firm, which surveys builders and housing starts each quarter.
Even so, he did not seem in a panic.
Over the past year, Houstonarea builders started 29,370 single-family homes — 6 percent more than a year earlier — making this region the nation’s No. 2 housing market after Dallas in terms of volume. Closings for the year totaled 27,547.
“The economic environment is very strong. Job growth is outstanding,” said Kyle Davison, division president for Meritage Homes, which expects to build about 900 homes in the Houston area this year.
Still, Davison said he has noticed “a bit of a pause” from higher interest rates, but that they are still relatively affordable.
Economic expansion is driving demand for housing, Dean said, but he cautioned builders about taking recent job growth reports
at face value.
The Texas Workforce Commission has reported strong back-to-back reports in recent months. In September, it said the region gained 128,700 new jobs over the previous 12 months. Those figures, however, are likely to be revised downward to the 65,000 to 75,000 annual range, Dean said.
“A lot of the consensus among economists is those job growth numbers are probably pretty inflated relative to reality,” he said at Metrostudy’s third-quarter briefing at a conference facility in CityCentre.
Since around August, builders have reported some level of sales and traffic declines, along with increased cancellation rates, Dean said.
In addition to higher mortgage rates, seasonality and high home prices may be factors in the softness.
Dean said a 2,800square-foot house in Sienna Plantation could be purchased in 2006 for around $240,000. A similar house today has been sold for $340,000. That’s a 42 percent increase, while the median household income in Fort Bend County increased by 22 percent during that period.
“That dynamic can’t be understated in terms of looking at any kind of sales slowdown we may be experiencing,” Dean said.
With interest rates on the rise, homebuyers will need to have pristine credit to secure a 30-year fixedrate mortgage rate of less than 5 percent.
The 30-year fixed-rate mortgage was 4.83 percent, up from 3.94 percent a year ago, according to Freddie Mac.
Metrostudy chief economist Mark Boud predicts higher rates over the next five to six years, peaking at 5.8 percent.
Higher mortgage rates directly affect buying power. Buyers looking at purchasing a $300,000 house with a 4 percent interest rate need a household income of around $93,800. At 6 percent, the required income goes up to almost $108,000.
After two strong quarters where local builders started well above 8,000 homes, Metrostudy has adjusted its annual forecast to just under 29,000 starts for 2018, which may be the peak year in the current building cycle. Next year, which the company had thought would be the peak volume year, may be flat or down slightly.
“The conditions on the ground indicate we’re starting a ton of homes this year,” Dean said. “And with headwinds from mortgage interest rate increases and of things of that nature, there’s not a strong reason to think we’ll see continued uplift in terms of volume in 2019. But there’s also no significantly negative conditions to anticipate seeing significantly downward volume in new-home volume in 2019 as well.”