Will the Housing Market Maintain Momentum?

Low mortgage rates and accelerated economic growth has meant that the housing market has started the year with a bang. But will it maintain this momentum? According to Freddie Mac’s January Outlook, a monthly report that looks at the housing market and economic growth, although the housing markets have been improving every year for nearly a decade, it could see a slight moderation in activity through the next two years.

“However, there are factors worth keeping an eye on in 2018, namely, is another recession on the horizon, how will housing markets respond to declining housing affordability and how will young adults move the housing market―more are living at home with their parents today than in 2000,” said Len Kiefer, Deputy Chief Economist at Freddie Mac.

The report indicated that home sales, which stood at 6.35 million last month, housing construction at 1.3 million starts, and house prices that saw a 5.7 percent increase are all expected to be modestly higher in 2018 relative to 2017.

However, the report indicated that the economy, even though it would remain positive, would not be able to keep pace with home prices, resulting in declining affordability, that could in turn lead to slow housing market activity.

The report also indicated that with modest income growth, the high cost of living and high student debt meant that young adults were struggling to move out of their parents’ homes and forming their own households. Although a recession does not appear imminent, we will keep an eye on potential recession indicators, including the flattening (and potential inversion) of the U.S. Treasury yield curve and the current rate of unemployment (4.1 percent in December 2017).

History has shown that an inverted yield curve and an unemployment rate below the natural rate usually leads to a recession in two-to-three years, the report said.