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The Dip Before the Rise

Housing activity is likely to remain weak in the coming months, at least until the market adjusts to the higher mortgage rates, according to Freddie Mac's [1] October Forecast [2]. The report revealed that rising mortgage rates along with increasing home prices have impacted homebuying activity in the third quarter of 2018.

The economy too is expected to slow down a bit, according to the forecast, to around 3 percent in Q3, 2018. Another macro indicator, the GDP, is also expected to "grow at a rate of 3 percent for 2018, slowing to 2.4 percent in 2019, and dropping to 1.8 percent in 2020 as the effects of expansionary fiscal policy fade," the forecast projected. Unemployment will average 3.9 percent for the rest of 2018 and fall slightly to 3.8 percent in 2019. However, it is expected to rise to 4 percent in 2020.

“The housing market continued to cool off in the Fall with slowdowns in home sales, new construction and price growth,” said Sam Khater, Chief Economist, Freddie Mac. “While we expect the weakness in housing activity to extend the next few months as the market absorbs the recent uptick in mortgage rates, the combination of strong economic growth and millennials moving toward homeownership should help home sales regain momentum and rise modestly in 2019.”

Mortgage rates, in fact, had remained steady at 4.6 percent during the third quarter, before increasing to 4.9 percent in the beginning of October. Freddie Mac expects mortgage rates to continue this climb and anticipates that the 30-year fixed-rate mortgage is likely to average 4.5 percent in 2018, rise to 5.1 percent in 2019 and further to 5.6 percent in 2020.

Home sales though have fallen for four straight months and despite an increase of 3.5 percent in new home sales in August, the overall trend in home sales still points downward, the report indicated. The report cited higher borrowing costs and house prices as the key reasons behind the slowing of home sales and projected sales to decrease 0.9 percent to 6.07 million in 2018 before regaining momentum and rising 1.8 percent to 6.18
million in 2019 and by 1.1 percent to 6.25 million in 2020.

Weaker home sales and home price growth also saw mortgage originations declining during the quarter, with the outlook projecting single-family originations to decline 8.9 percent year over year to $1.65 trillion in 2018 and remaining at the same level through 2019 before falling once more to $1.60 trillion in 2020.