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Will Affordability Issues Bring Housing Growth to a Standstill?

slow-growthHome prices are climbing higher, interest rate hikes are imminent, and supply continues to fall short of demand. Are these factors enough to  derail expansion in the housing market?

Even if the above conditions persist in the housing market, a rise in earnings growth is projected to keep mortgage payments as a share of income below their long-run average over the next three years.

A report from independent economic research company, Capital Economics, says affordability will not halt market recovery.

"While tight mortgage lending standards will prevent a surge of housing demand, the risk of worsening affordability bringing the housing market recovery to a halt looks low,"said Matthew Pointon, Property Economist for Capital Economics.

Since the Great Recession, home prices have been fighting their way back to peak levels reached prior to the crisis and some markets' home prices have more than recovered.

In the midst of tight supply, heightened competition for buyers, and unpredictable financial markets, U.S. home prices continued to rise in the fourth quarter.

The Federal Housing Finance Agency's (FHFA)House Price Index (HPI) shows that home prices rose 5.8 percent year-over-year in the fourth quarter of 2015. Prices increased 1.4 percent from the third quarter of 2015, marking the 18 consecutive quarterly price increase in the purchase-only, seasonally adjusted index. Home prices were up 0.4 percent month-over-month for December.

“Instability in financial markets did not seem to put much of a drag on home prices in the fourth quarter,” said Andrew Leventis, FHFA Supervisory Economist. The 1.4 percent rise in home prices "was in line with the extremely steady—but historically elevated—appreciation rates we have been observing for several years now."

Freddie Mac reported this week that mortgage interest rates remained low at 3.71 percent, but cautioned that the Fed may take action soon and raise rates.

Sean Becketti, Chief Economist, Freddie Mac, said, "Dovish comments by Federal Reserve Chair Janet Yellen on Tuesday triggered a rally in Treasury markets and drove the 10-year yield down 13 basis points from last week's high. Yellen's comments came too late to affect this week's mortgage rate survey, and the 30-year mortgage rate remained unchanged at 3.71 percent. However, if the Fed's cautious tone persists, mortgage rates may register the impact in subsequent weeks."

According to Pointon, "Affordability, in terms of mortgage payments as a share of income, does not strike us as a reason to expect a housing slowdown. That said, there are other reasons why activity will not take-off and is likely to slow in 2018."

He continued, "For one, a lack of inventory will mean existing home sales will only rise slowly over the next three years. And while those able to get a mortgage will find their mortgage payments are manageable, many households will struggle to qualify. Lending standards are being eased, but only gradually, locking many with poorer credit scores out of the market. Finally, an economic slowdown in 2018 will hit job creation and confidence. So while the housing market recovery will be steady and will eventually slow, it will be hard to pin the blame on unaffordable mortgage payments."

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