Why the Housing Market Should Remain Firm in 2019

Freddie Mac knows a thing or two about the housing market. Despite all the controversy of the past, and being in federal government conservatorship, and even considering President Trump’s efforts to limit it and Fannie Mae’s dominance and taxpayer risks ahead, this is one of the world’s top 10 mortgage pooling destinations.

Freddie Mac now is forecasting a steadily growing housing market in the United States. The government-sponsored entity also is signaling that some of the biggest problem mortgages that helped add fuel to the fire of the Great Recession remain low.

The May-2019 forecast sees steady housing market growth based on a continued positive impact of low mortgage rates, as well as a strong labor market bolstered by low unemployment and modest wage growth.

As for mortgage rates in general, Freddie Mac sees 30-year fixed-rate mortgages averaging 4.3% in 2019. That is below the 2015 average of 4.5%. The agency also sees total home sales rising to 5.98 million units in 2019, following the prior month’s trends of higher existing home sales.

Where Freddie Mac differs from simultaneous news is that it sees the housing starts forecast remaining unchanged after downward revisions (for January and February data) lowered its 2019 annual forecast to 1.26 million units. However, the most recent housing starts data from the U.S. Department of Commerce (also released on Thursday) shows a 5.7% rise in April (from March) to a seasonally adjusted annual rate of 1.235 million units. The Commerce Department also showed that residential building permits rose by 0.6% in April to an annualized pace of 1.296 million units. That rise in permits was said to be the report’s first monthly percentage gain since December.

There is also some decent news on pricing for homeowners wanting to sell soon. Freddie Mac sees home price appreciation having ticked up to 3.6% for 2019.

Loan originations for single-family mortgages are expected to rise during the rest of 2019, and the lower rates are expected to help applications for refinances to rise to 33% of all mortgages from 30% in 2018.

One issue that matters very much in the grand scheme of things is in home equity loans and in the “cash-out” refinancings. These are the hot-potato areas of mortgage lending, and they can leave borrowers and lenders alike in a lurch. Freddie Mac’s May 2019 forecast notes showed the following data:

  • Adjusted for inflation in 2018 dollars, an estimated $16.6 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages in the first quarter of 2019, down from $19.1 billion a year earlier.
  • “Cash-out” borrowers represented 76 percent of all refinance loans in the first quarter of 2019. That’s down from 82 percent at the end of 2018.

Sam Khater, Freddie Mac’s chief economist, said for the May 2019 outlook:

Our outlook for the housing market remains largely unchanged. We still expect stronger home sales and housing starts in the coming months due to favorable market conditions and accelerating wage growth… Additionally, our quarterly report on refinance activity shows that few U.S. homeowners are choosing to tap into their largest source of wealth despite having a record $16 trillion in home equity available to them. Most homeowners remain reluctant to increase their mortgage balance, whereas we continue to see balance increases on auto loans, credit cards, and student loans.

It is important to understand that when Freddie Mac (or Fannie Mae for that matter) makes its forecasts, it is basically doing so on the so-called conventional loans that it covers. These agencies are not making predictions on the $750,000 and $1,000,000-plus mortgages. The Federal Housing Finance Agency set the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac in most of the United States at $484,350 for one-unit properties. This was an increase from the $453,100 that had been set in 2018.