May 23, 2019
By Hari Kishan
BENGALURU (Reuters) – U.S. house prices will rise this year by less than was predicted just three months ago, despite the Federal Reserve wiping out the prospect of future interest rate rises and recent market speculation about a cut, a Reuters poll showed.
While property market experts said a lack of supply of affordable new homes is likely to persist and so house price rises will outpace overall inflation, the normally rate-sensitive housing sector is not set to drive the economy in coming months.
The survey of nearly 50 housing analysts polled May 9-22 predicts U.S. house prices to rise 3.3% this year, a downgrade from the 4.0% rise predicted three months ago. House price rises are then forecast to slow to 3.0% next year and 2.7% in 2021.
S&P Case-Shiller Index, which measures house prices in 20 U.S. metropolitan cities, is up a little over 3% on an annualized basis. If the poll predictions come true, it will be the weakest house price rise since 2012.
“I believe we are in the late stages of the housing cycle in which the market retreats, first in terms of sale volumes and then with respect to prices,” said Issi Romem, chief economist at Trulia, a real estate website owned by the Zillow group.
U.S. economic growth beat expectations in the first quarter, but has since started to show signs of a slowdown.
Existing home sales, which make up for about 90% of all home sales in the United States, slipped in April for the second straight month. The latest Reuters poll forecasts them at an average 5.30 million unit annualized rate over the next four quarters, identical to those in the February poll and a whole 2.0 million short from the last peak in 2005.
After climbing to a seven-year high of about 5% late last year, the 30-year fixed mortgage rate has since dropped sharply, according to data from mortgage finance agency Freddie Mac. Currently averaging around 4%, it is forecast to inch up to 4.25% this year and 4.40% next year.
Yet nearly two-thirds of 41 analysts who answered an additional question said the risks to their housing market outlook were skewed more to the downside.
“The gradual slowdown of the economy has a potential to significantly lower buyer confidence and further depress the pool of potential buyers,” said Nathaniel Karp, U.S. chief economist at BBVA.
A robust job market, rising wages and low mortgage rates have kept demand for housing elevated. U.S. home builders have responded to this by building more properties, which has led to a rise in housing inventory by almost 2% from a year ago.
However, that rise in inventory is not enough to meet continued robust demand for housing.
“Supply has not yet caught up, but it is in the improving direction, so home builders are building more, our inventory shows a little increase. I would like to see a drastic increase, but we are not getting those big substantial increases,” said Lawrence Yun, chief economist with the National Association of Realtors.
Among property analysts who answered an additional question, 20 of 35, or nearly 60 percent, said it would take two years or more for the housing supply to reach adequate levels to meet demand. Nine said one to two years, while the rest said six months to one year.
Starter homes, which are at the bottom end of the market, and make up for most of the demand, are expected to take even longer to catch up, some analysts said.
While analysts said lack of supply is having an impact on the housing market, some are also blaming last year’s revamped U.S. tax code, which reduced the amount of mortgage interest payments homeowners could deduct, for crimping demand.
“Price gains have slowed sharply, hit at first by rising rates but also sucker-punched by ‘tax reform’,” said Robert Brusca, chief economist at FAO Economics.
On an affordability scale of 1 to 10, analysts again rated U.S. house prices at 7, borderline expensive, where it has been since February 2018.
“While home prices are on average more or less in line with fundamentals, prices are higher than what could be justified by economic fundamentals in some of the most attractive metropolitan areas,” noted Karp at BBVA.
“That said, the level of misalignment has been narrowing for some time and will continue to do so going forward as demand shifts to more affordable locations where growth had taken longer to recover after the Great Recession.”
(Polling by Indradip Ghosh, Richa Rebello and Nagamani Lingappa; Editing by Ross Finley and Jonathan Oatis)