Baby boomers – those born between 1946 and 1964 – have steered economic trends for decades and have the highest rate of homeownership in the country, approximately 80 percent. Now, as the oldest members of the generation edge into their 70s, they are deciding to stay in their homes. According to a Realtor.com housing shortage survey, boomers have the least interest in selling their home. Approximately 85 percent of baby boomers surveyed indicated they are not planning to sell their home in the next year. The main reason, according to the survey, is that their current home meets the needs of their family.
At the May Federal Reserve (Fed) meeting last week, all eyes were on the 10-year Treasury yield. In late April, that yield topped 3 percent for the first time in more than four years. With yields on the rise, housing market participants expect this to mean higher interest rates from central banks. It’s often overlooked that the popular 30-year, fixed-rate mortgage is benchmarked to the 10-year Treasury bond. In fact, as shown in the chart below, since the end of the recession, the 30-year, fixed-rate mortgage has on average remained 1.7 percentage points higher than the 10-year Treasury bond yield. So, if that trend remains consistent, if the 10-year Treasury yield rises above 3 percent, then the 30-year, fixed-rate mortgage rate should also rise to 4.5 percent.
“The recent increase in the 10-year Treasury yield indicates higher mortgage rates are likely in the very near future. But, even as mortgage rates increase, we remain well below the historical average of about 8 percent for a 30-year, fixed-rate mortgage – and house-buying power remains strong.”
Yesterday, the Bureau of Labor Statistics released the employment situation report for April. Here are the highlights. Total non-farm payroll jobs increased by 164,000 in April. In fact, total non-farm payroll jobs have now increased every month since October 2010. Since that date, the U.S. economy has added more than 17.5 million jobs. The unemployment rate edged down to 3.9 percent, a 17-year low, in April and average hourly earnings are up 2.6 percent over a year ago for production and non-supervisory employees. So, why would an uptick in wages matter to a housing economist? Read on.
A common adage about real estate is that it’s local. The dynamics of one housing market can be very different from another depending on the local economy and access to natural amenities, like mountains or water. The levels of loan application defect, fraud and misrepresentation risk vary greatly based on local conditions as well. In fact, substantial differences exist among the 100 markets that we track with the Loan Application Defect Index. For example, the riskiest market this month, Little Rock, Ark., is almost twice as risky as the safest market, Rochester, NY.
Last week, the average 30-year, fixed-rate mortgage rose 5 basis points to 4.46 percent, reaching its highest level since January of 2014. The consensus among economists is that the 30-year, fixed-rate mortgage will approach 5 percent by the end of this year. All else held equal, this will make housing more expensive. However, some perspective is important. The historical average for the 30-year, fixed-rate mortgage is about 8 percent so, even with the expected increase, mortgage rates will still be low by historical standards.
In March, the housing market continued to underperform its potential. Actual existing home sales are 4.5 percent below the market potential for home sales, according to our Potential Home Sales model. The lack of supply is the primary culprit. The inventory of homes for sale in most markets remains historically tight, yet demand continues to rise as millennials further age into homeownership. Limited supply and rising demand means house prices are surging, so why aren’t more existing homeowners selling their homes? Two market dynamics are at play.
It’s no secret that the limited supply of homes for sale is the biggest issue facing the housing market today. From a short-term perspective, this month’s overall pace of housing starts, 1.32 million units, may modestly alleviate the supply shortage. Housing starts increased 1.9 percent month over month and are 10.9 percent higher compared with March 2017. Housing completions, the number of net new homes added to the housing stock, increased by 1.9 percent compared with a year ago, which provides some immediate relief for the supply shortage.
It’s a popular myth – the millennial generation is destined to be a generation of renters – avocado toast, anyone? With student loan debt burdens, the scars of the Great Recession, and limited housing supply, the myth is rooted in some real challenges for millennials. However, despite these challenges, millennials are not only interested in homeownership, they are the primary reason that the homeownership rate increased over the past year.
Today, the Bureau of Labor Statistics released the employment situation report for March. Here are the headlines. Total non-farm payroll jobs increased by 103,000 in March. Total non-farm payroll jobs have increased every month since October 2010. Since that date, the U.S. economy has added more than 17.5 million jobs. The unemployment rate remained again unchanged at 4.1 percent, a 17-year low, and average hourly earnings are up 2.4 percent over a year ago for production and non-supervisory employees. While the number of jobs created may seem disappointing, the data continues to paint a positive picture of the economy, but those are not the numbers that really matter.
It’s been a long time coming – a rising rate environment. The 30-year, fixed-rate mortgage has been below 4.5 percent since late 2013 and is now finally moving consistently higher. According to the consensus of economic forecasts, it is likely to approach 5 percent by the end of this year. This matters for defect, fraud and misrepresentation risk as rising mortgage rates reduce the benefit of refinancing and increase the share of purchase loan transactions in the market. As we have noted before, purchase loan transactions are riskier than refinance transactions.