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HereÕ the real danger to the recovering housing market

First American explains new construction’s future role in housing

Interest rates continue to increase since the election of President-elect Donald Trump, bringing with them new dangers to the housing market and affordability.

The 30-year fixed rate mortgage increased for the fifth consecutive week and reached a new high for 2016 this week at 4.13%, according to Freddie Mac’s survey.

This increase is already making waves in the housing market. According to Black Knight’s report, the number of potential refinance candidates fell by more than 50% over the last few weeks.

And it could only continue to increase from here. Housing experts are saying there is a 100% chance that the Federal Reserve will elect to raise rates at its last meeting of the year.

But now, next year could bring a new danger to the housing market via raising interest rates, according to Mark Fleming, First American senior vice president and chief economist. Supply for first-time buyers will be in greater demand than ever.

“As rates go up, all those existing home owners now don’t have an incentive to move,” Fleming told HousingWire. “They may not supply their homes to the market for that potential first-time homebuyer to buy.”

While previously first-time buyers tended to look at pre-existing homes, currently homeowners may be running out of incentives to put their home on the market, making the need for affordable newly constructed homes more important than ever, Fleming said.

“The need for new housing to be more affordable I think will be more important than it’s been in a long, long time,” he said.

However, there is still an upside. While interest rates may be increasing, they are still at historic lows, and are expected to remain so throughout 2017. Home supply could continue to be a problem throughout next year, but affordability is still much better than it was during housing’s peak years of 2006 and 2007.

In fact, despite increasing interest rates, 2017 will still finish out the year 34% more affordable than the market peak in 2007, according to First American’s forecast.

“We do lose more affordability – rates go up, purchasing power goes down – but even having done that, it still goes from 36% more affordable than housing peaks down to 34% more affordable, which, in qualitative terms, means still highly affordable,” Fleming said.

Overall, the housing market continues to improve. Mortgage credit availability increased, easing credit standards slightly in October, according to the Mortgage Bankers Association’s Mortgage Credit Availability Index, which analyzes data from Ellie Mae’s AllRegs Market Clarity business information tool.

Pending home sales increased only slightly in October, but enough to hit the highest pace since July this year, according to the most recent report from the National Association of Realtors.

And a new report from Black Knight Financial Services shows that by one metric, the housing market is healthier than it’s been since the crisis began: the rate of loans in active foreclosure is lower right now than at any point in the last nine years.

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