Market Opportunity in Surprising Places
October 25, 2016
Vice President, Chief Economist
Head of Economics and Research Department, Freddie Mac
At the end of 2015, most forecasters predicted the Federal Reserve would increase short-term interest rates four times in 2016. And, as a consequence, the consensus predicted an increase in mortgage rates and a drop in mortgage originations, especially for refinances. Events this year proved the forecasters wrong. The Federal Reserve has been on hold throughout 2016, and 30-year mortgage rates have dropped 60 basis points. In fact, mortgage rates approached all-time lows in July 2016 thanks to the Brexit vote in the UK. We expect the 30-year mortgage rate to end 2016 at 3.6 percent and to average only 3.7 percent in 2017. These “lower for longer” mortgage rates have generated a surge both in home purchases and in refinances of existing mortgages. As a result, we’re projecting a $2 trillion market in mortgage originations in 2016, with a modest slowdown to $1.7 trillion in 2017.
The combination of ultra-low mortgage rates and a limited supply of homes for sale has fueled rapid house price growth. The data suggest home buyers are stretching further to buy a house. Our preferred measure is the ratio of house prices to family income. At the end of 2015, house-price-to-income (PTI) ratios were unusually high by historical standards in 20 percent of the fifty largest metros. Just two quarters later, the share of metros with high PTIs had risen to 30 percent.
When mortgage rates finally stabilize and increase, as they inevitably will, house price appreciation will naturally moderate. Higher mortgage rates will make the monthly payments on home purchases out of reach for some buyers, and refinance volume will drop off. Instead of straining to cope with the volume of business, industry stakeholders will be searching for pockets of opportunity. We think one of those pockets will be among the 55+ population.
The impact of the 55+ age population
Older Americans—those age 55 and older—comprise a quarter of the population, but control two-thirds of the housing equity in the U.S. And for most of these households, their home is their largest asset. Their numbers and housing wealth guarantee that the housing decisions of older homeowners will play an outsized role in shaping the housing opportunities available to the generations that follow them — Gen X and the massive Millennial generation. The influence of the 55+ age population will last a long time; today’s 65-year-old can expect to live until age 84 on average. With a longer life span and ample wealth, many older homeowners may buy and sell several more homes before they’re done.
To anticipate the impact of the 55+ age population on the nation’s housing, Freddie Mac commissioned a survey of older Americans on their attitudes toward their current and future housing options. The survey sample included 5,914 individuals 55 years or older with a subsample of 4886 homeowners. Here are some of the key findings.
- Two-thirds of the homeowners are satisfied with their homes and communities and want to age in place.
- However, many of those same homeowners are not sure they will be able to afford the retrofitting their homes will require as they grow older. Other studies indicate the remainder of our respondents may be underestimating the need for retrofitting.
- Many respondents want to age in place but in a different place from their current residence. Over 70 percent of those who plan to move again say they are more likely to buy a house than rent. That suggests roughly 18 million 55+ homeowners may be shopping for another house in the coming years.
- Surprisingly, downsizing is not a high-priority for the next move.
- Another surprise—more than a third of the 55+ age population still have a mortgage and a majority of those have ten or more years left to pay on their mortgage.
Based on data from the American Community Survey, 51 percent of Arizona households that own their home have at least one household member over 60 years old. Considering the numbers, these factors are very relevant to the Arizona market.
In the short-to-medium term, mortgage rates will remain low, and housing activity will continue to grow. But even when rates stabilize and volume tapers off, the 55+ age population will remain active participants in the housing market.
Sean Becketti came to Freddie Mac from Flagstar Bank where he served as Senior Vice President and Head of Modeling & Analytics. Earlier, he headed up Fannie Mae’s applied research function where he led a 70-person team of modelers, analysts and developers. His experience also includes senior executive roles with Washington Mutual and Wells Fargo where he led research functions focused on mortgage markets and capital markets. Mr. Becketti previously worked at Freddie Mac from 1996 – 2001 in several senior financial and analytical roles. Earlier in his career, he served as senior economist with the Federal Reserve Bank of Kansas City and as an assistant professor of economics at UCLA.
Real Estate & Business Forecast Seminar
FRIDAY, NOVEMBER 18, 2016 – 9:00 AM TO 12:30 PM
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