MNI INTERVIEW: Resilient Housing To Rebound As Rates Fall

Strong demand for homes from millennial buyers in a market that's well short of new supply has kept housing buoyant despite sharply higher mortgage rates, Freddie Mac deputy chief economist Len Kiefer told MNI.

"Mortgage borrowers have held up pretty well across various credit" categories and "home prices have actually been accelerating in the most recent data which is reflective of the very low levels of housing supply," Kiefer said in an interview.

The number of transactions remains low, a trend he expects to persist in 2024. But this reflects legions of fixed-cost mortgage holders who locked in ultra low rates and are now draining supply from the market, rather than any recessionary impulse for housing.

"In a recession you'd expect home values would fall and performance would worsen with defaults higher, It's actually not what we are seeing at all," he said.

LOWER RATES

Mortgage rates have trended lower for three weeks to 7.44%, a trend Kiefer expects to continue over the next couple of years. He sees mortgage costs potentially getting to the upper end of a 5-6% range late next year and into 2025. (See MNI INTERVIEW: Fed Hikes Over, Banks Still Vulnerable-George)

"We've seen evidence even with the still very high rates demand has held up and if rates were to drop significantly that certainly could spur a lot more demand," he said.

The combination of ongoing economic strength, lower inflation and lower mortgage rates should bring more potential homebuyers into the market, although transaction levels will remain depressed, Kiefer said.

Freddie Mac expects GDP growth next year in the range of 1-2%, slightly below estimates of trend. "Our baseline doesn't call for a recession over that period but a slowdown in growth and maybe an uptick in unemployment and less consumer spending."

The tighter level of housing supply has translated to upward pressure on house prices recently but that should turn neutral next year. "I do expect the rate of growth in price to moderate but not to be falling," he said. "It's roughly flat on an inflation-adjusted basis."

It's likely that the housing boost to inflation "continues to moderate in the next year, just given what we know about how things get measured and what's happened with market rents," the Freddie Mac economist said.

INCOMING BUYERS

Kiefer says housing market dynamics will continue to favor new home sales over existing homes, making things tougher for prospective buyers. Nonetheless, low unemployment and favorable U.S. demographics mean there is still significant number of first time buyers entering the market.

Freddie Mac's latest estimate shows the housing market is short about 3.8 million housing units, about equal to just over two years of production at the current rate, he said.

"Even with all these challenges, they've been buying and that's been giving some bright spots in the housing market and given the age profile of American demographics that's likely going to continue in the next year," Kiefer said.