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Affordability May Become a Concern

moneyAffordability is strong in the U.S. housing market for now, according to Arch Mortgage Insurance, but how much longer will that be the case?

Arch MI’s Winter 2017 Housing and Mortgage Market Review (HaMMR) has the answer—over the next two years, housing affordability will take a hit, particularly among millennials. During that time, home price appreciation is expected to continue to outpace incomes.

“Housing will become less affordable, hurting millennials and renters the most,” the report stated. “With future interest-rate increases also set to hurt affordability, this suggests that the sooner someone who is willing and able makes the jump from renting to owning, the better.”

Despite the prospect of declining affordability, the current housing market features several positive fundamentals. The likelihood of home prices declining over the next two years was at 4 percent, and is at an unusually low point in the vast majority of cities, according to Arch.

“Positive fundamentals in today’s housing market include strong affordability due to below-normal mortgage rates, total employment growth of 2 to 2.5 million jobs a year, an extremely tight inventory of homes for sale, accelerating rent increases, and low vacancy rates,” Arch MI Chief Economist Ralph DeFranco said. “While there are many negatives, ranging from weak wage growth to a near-tripling of student debt over the past 10 years, rapid price growth suggests the supply shortfall is more important. Given these positives for home prices, it isn’t surprising that our models give a very low chance that home prices could be lower in two years in the vast majority of cities across the country.”

Arch MI predicts that the incoming administration will loosen lending guidelines which have tightened up since the crisis, which will stimulate demand more than supply.

“Much of the drag on supply comes from higher building fees in recent years and local governments’ tight building restrictions, which will not be affected much by changes in Washington,” the report stated.

According to Arch MI, residential construction will increase by 5 to 15 percent over the next two years, but it needs to continue to ramp up for “several more years” based on the company’s estimates of household growth during that time.

“We estimate construction needs are closer to 1.4 million units a year, compared to actual housing starts now of around 1.2 million, up from 1.0 million in 2015,” the report stated. “Purchase originations will grow 10-15 percent a year as cash purchases decline and construction increases. On top of that, there is also some pent-up demand from Millennials that will add to demand as wage growth finally picks up with the tightening labor market.”

Click here to view the complete HaMMR from Arch MI.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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