Affordability is beginning to take its toll going into the home-buying season, according to the March Outlook from Freddie Mac.
Home prices continue to rise, increasing 76% from 2000 to 2016 while per capita income increased 72% during that same time period.
And the squeeze in housing inventory is sending home prices even higher, creating declines in affordability and putting a pinch on prospective homebuyers, according to the GSE’s report. Many homebuyers will be sidelined this spring home-buying season due to these affordability constraints, and Freddie Mac predicts home sales will fall to an estimated 5.9 million in 2017. This is down from 2016’s 6 million home sales.
“Recent indications of stronger growth convinced the Federal Reserve to raise the federal funds rate this month and to signal further increases later this year,” Freddie Mac Chief Economist Sean Becketti said. “These Fed actions are unlikely to derail the moderate improvements in growth and employment, but rising interest rates will reduce mortgage originations and put a cap on house sales in 2017.”
“As we approach the spring home-buying season, housing will be financially out of reach for many buyers because they will be competing in an environment of tight inventory, rising house prices and rising mortgage rates,” Becketti said.
However, the pending home sales report released Wednesday by the National Association of Realtors indicated a strong start to the season as it increased to the highest level in a year.
Freddie Mac also predicted a drop in mortgage originations of 25%, however the report showed this will come almost entirely from plummeting refinances. However, rising home prices and historically low interest rates could still entice homeowners to tap into their equity through cash-out refinances.
“Additionally, based on our analysis of 2016 refinance activity, markets with the largest increase in house prices also experienced a high share of cash-out refinances,” Becketti said. “For example, in the Denver and Dallas metro areas the refinance cash-out share was above 50% for all borrowers who refinanced last year.”