Rising mortgage rates will set the scene for the housing market in 2019. They will affect everyone, driving up costs for home buyers and creating more demand for rentals. Even current homeowners could start to feel locked into their mortgage rates.
Here’s a snapshot of what’s in our crystal ball:
Despite steady climbing for the past two years, mortgage rates remain lower than they were during most of the recession and below average for the type of strong economic growth we’ve been experiencing. That will change in 2019, as the 30-year, fixed rate mortgage reaches 5.8 percent – territory not seen since the dark days of 2008, when rates were racing downward in response to the housing crisis. In 2019, rising rates will compound the effect of still-climbing home values, making homeownership even less affordable. Already, rising mortgage payments eclipse home-value gains, a phenomenon that can both encourage homeowners to stay put – to hold onto low mortgage rates that are disappearing in the rear-view mirror – and discourage would-be first-time home buyers.
Although rising mortgage rates will affect home buyers first, renters will not be far behind. As higher rates limit the number of homes that potential buyers can afford, some would-be buyers will be too financially stretched to buy and will continue renting. As a result, recent (and very slight) drops in rent will reverse and turn positive again. The shift will be muted, however, by continued steady investment in apartment construction, which will prevent rent growth from shooting too far above income growth. In the third quarter 2018, the U.S. median rent cost 28.2 percent of the U.S. median income – considerably higher than the 25.8 percent renters paid historically.
Job creation has been concentrated in urban cores, and so has the affordability crisis – a phenomenon that’s increasingly pushed people to nest and grow their families in the suburbs. The disconnect between urban jobs and suburban residents will continue in 2019 and contribute to longer, more crowded commutes. This may be especially daunting for people in markets where living within their means already requires lengthy travel times: A home in central Boston, for example, is valued 303 percent more per square foot than a typical outlying home, while the premium for homes in central Washington, D.C., compared to outlying areas is 218 percent per square foot. Politicians in Washington, D.C. and state capitals around the country are talking up new infrastructure investments, but some may be too little too late given rising construction costs and planning delays.
Spurred by the possibility of attracting tens of thousands of jobs from online retail giant Amazon, some areas that lost their headquarters bids to suburban New York and Washington, D.C., nevertheless got in touch with their inner can-do – and that will pay off.
Shortly before Amazon made its big announcement, Chicago debuted its “P33” initiative, aimed at becoming a tech hot spot by the city’s bicentennial in 2033. It’s been dubbed the “Burnham plan for Chicago’s tech future,” a reference to Daniel Burnham, whose 1900 attempt to create “Paris on the Prairie” both beautified the city and made it a force in urban planning.
Former Amazon HQ2 contender Atlanta already has seen some action since it was passed over by the Prime vendor: Convoy, a much smaller Seattle-based company, is opening its East Coast office there. Norfolk Southern may relocate its headquarters there from the city for which it is named, Norfolk, Va.
While New York and D.C. weigh what Amazon’s arrival means for them, could even Tucson could find a taker for its 21-foot saguaro cactus?
This prediction for 2019 is a logical extension of what’s already been happening: About 15,000 homes were destroyed by wildfires in California alone in 2018 – including at least one entire town in what used to be the “off” season – and many others by storms along the gulf coast.
As the frequency and magnitude of natural disasters continues to escalate, builders and developers will focus on preventative and/or protected building materials and designs. While in the past, builders have returned quickly in the aftermath of natural disasters – typically building nicer and more expensive homes than before – that may not be the case going forward. Building costs are on the rise, and insurers are increasingly reluctant to offer policies in danger zones (or are charging higher premiums to do so) – both of which could translate into slower and costlier rebuilding.
Flood losses are growing as well, and projections for homes inundated by rising sea levels and storm surges over the course of a typical 30-year mortgage begun in 2020 are not encouraging.
One mitigating effect to rising mortgage rates will be slower home value growth. In October, home values were up 7.7 percent from a year earlier, to a U.S. median of $221,500. Zillow forecasts growth of 6.4 percent from October 2018 to October 2019; a Zillow survey of housing experts and economists anticipates a 3.79 percent increase for calendar 2019. Both forecasts indicate cooling from red-hot growth of 8 percent in March of this year.