2019 Outlook: Housing affordability concerns are expected to increase

Rising mortgage rates will negatively affect demand next year

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Dec 12, 2018, 11:12 ET

COLUMBUS, Ohio, Dec. 12, 2018 /PRNewswire/ -- Nationwide's latest Health of Housing Markets Report (HoHM Report) found that demand for housing is slipping in response to rising mortgage rates – worsening housing affordability – despite a strong labor market and positive household formations. The report is forecasting a neutral outlook for 2019 (the third quarter in a row), indicative of a mixed forecast for the housing sector over the next year.

"While house price growth has decelerated in recent quarters, poor housing affordability continues to weigh on the outlook for housing," said David Berson, Nationwide senior vice president and chief economist. "Several years of rapid price appreciation and rising mortgage rates have begun to reduce homebuyer appetite for purchases."

Nationwide's proprietary Leading Index of Healthy Housing Markets (LIHHM) is unusual among housing market reports as it is a forward-looking measure of housing market sustainability. The demand metrics within the LIHHM remain positive with an ultra-low unemployment rate and continued solid job gains. Demographics are also supportive of housing demand as the millennial generation ages into their prime homebuying years.

Regionally, nearly half of the LIHHM performance rankings show a neutral rating, also suggestive of a mixed outlook for housing growth in 2019. Nationally, demand factors are generally positive in most areas, but supply conditions remain tight while affordability is a growing concern with price appreciation still at an unsustainable pace in many local housing markets.

The 10 metro areas with the most positive LIHHM forecasts are, in order: Waterloo-Cedar Falls, Iowa; Lawton, Okla.; Chicago-Naperville-Arlington Heights, Ill.; Fayetteville, N.C.; Abilene, Texas; Sumter, S.C.; Jacksonville, N.C.; Watertown-Fort Drum, N.Y.; Atlantic City-Hammonton, N.J.; and, Merced, Calif.

The 10 MSAs with the least positive LIHHM outlooks are: Bismarck, N.D.; Kennewick-Richland, Wash.; Victoria, Texas; Pocatello, Idaho; Pueblo, Colo.; Lewiston, Idaho-Wash.; Fargo, N.D.-Minn.; Ogden-Clearfield, Utah; Portland-South Portland, Maine; and, Albany, Ore.

Faster household formations sustaining demand

After years of below-average expansion of households, total formations at a national level have accelerated in recent quarters to move above the long-term trend. Solid job and income gains are putting potential homebuyers in much better financial shape for a purchase. Faster household growth is supporting further demand for both owner-occupied and rental housing at a time when the supply of homes on the market remains highly constrained.

Millennials are driving household growth with homeownership rates for ages 25 through 34 at the highest levels in years. This is evidence that there are more first-time homebuyers vying for entry-level homes across the country.

At a regional level, household growth has picked up, too. Compared with the local 15-year average, more households have been formed over the past year in about 200 metro areas. Several MSAs in Florida are leading the country in household growth. Other areas above the local average include along the Pacific coast, Colorado, Arizona and much of the Carolinas. Many of these areas are among the hottest housing markets in the country.

Despite a lull in home sales activity this year, the outlook for the housing sector's overall health in 2019 is steady. The pickup in household formations creates a solid basis for housing demand even as mortgage rates climb further. While historically low supply and higher financing rates will likely drag on sales a bit, buying should not drop off much from this year's pace. Home price gains are expected to decelerate to near the long-term trend.

More information about the HoHM Report, including the methodology used, can be found at blog.nationwide.com/housing. The HoHM Report is released on a quarterly basis online and in print.

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SOURCE Nationwide