Mortgage giant Freddie Mac released its monthly Outlook for February which looked at the potential impact that rising inflation could have on housing and mortgage markets.
The outlook explains that rising inflation would have a significant impact on housing markets by driving mortgage interest rates higher. And a large tax cut or major infrastructure bill could surprise markets and cause a further increase to inflation.
But what should real estate agents be on the lookout for during the Spring homebuying season?
With higher inflation and rising interest rate, there comes a negative impact on the housing and mortgage markets causing home sales and mortgage originations drop. However, Freddie says while inflation will occur, it expects growth to be modest.
“Which course inflation takes over the next year will have important implications for housing and mortgage markets,” Freddie Mac Chief Economist Sean Becketti said. “On balance, the risks to higher inflation outweigh lower inflation, but in our estimation, most of the reflationary factors have already been baked into current interest rates and inflation is likely to increase only modestly over the next two years.”
But with mortgage rates rising, the lack of housing inventory and home prices hitting new highs, affordability could be threatened and slow down home sales. In fact, the market already began moving away from refinance originations as mortgage rates increase.
“As mortgage interest rates rise, larger, more expensive markets will continue to become more unaffordable, which will cause home price growth to slow,” Zillow Chief Economist Svenja Gudell said. “In particular, we expect coastal markets to show slowing price appreciation first, while the country’s more affordable, often inland and somewhat smaller markets – places like Nashville, Milwaukee and Louisville – will continue to see strong price appreciation.”
And one expert explains that the continued price acceleration is unprecedented and even unhealthy amid rising interest rates.
“Why is it [home prices] accelerating?” said Lawrence Yun, National Association of Realtors chief economist. “The continuing shortage of inventory is leading to active competition among buyers. Other price trends for January, including NAR’s median sales price, is showing even faster gains.”
“Such a trend of price growth outpacing incomes is not healthy nor sustainable,” Yun said. “Only an increase in inventory can soften the price pressure. Any impediments to new home construction need to be re-examined and possibly removed soon.”
However, one website for real estate agents, Trulia, claims that increasing home prices are due to a healthy real estate market.
“Driven in part by a healthy economy and near historic low inventory, the U.S. housing market is showing signs of picking up steam,” Trulia Chief Economist Ralph McLaughlin said. “Home price increases in December were the largest in two and a half years, and homebuyers should expect the quickening of price gains to persist this spring buying season.”
But don’t expect a slow-down anytime soon. In fact, home prices will be much the same at the end of 2017.
“Annual house price growth reached 5.8% in December according to Case-Shiller, the fastest pace of growth for 2½ years,” Capital Economics Property Economist Matthew Pointon said. “With market conditions set to remain tight, as faster income growth supports housing demand, prices are set to make a similar gain this year.”