Low rates could push home prices higher
This week has been pretty slow compared to what we've seen for the past year or so which is a nice break from volatility.
You've probably seen headlines about the deadly coronavirus in China, however. Investors are keeping an eye on that even though it has nothing to do with money, yet. As of this week, 17 people have died with more than 600 people infected. There has also been a case reported in the United States in Washington state.
The issue that could arise is a sharp decrease in spending, especially with regard to travel and retail. China is the world's largest consumer of commodities, so imagine millions of people within that population not spending money because they're staying home to avoid getting sick. There are two major cities in China that are essentially on lockdown and one of them is home to more than 11 million people. The city of Beijing canceled many public events, including some of the massive Lunar New Year celebrations, and that in and of itself is a tough blow to their local economies.
As a reminder, there is not larger scale economic impact quite yet, but if the virus continues to spread and becomes more of an epidemic like SARS was in the early 2000s, we will likely see a ripple effect.
Housing prices predicted to rise
Mortgage rates are still staying low and steady, which is great because that gives consumers more purchasing power. Combined with a strong labor market and increased wages, that's great news for the housing industry.
This week the Freddie Mac 30-year fixed-rate mortgage average was 3.6%. That average dropped below 4% last year on May 30 and has not gone back above 3.99% since. Fannie Mae's forecast predicts we will stay close to this range of 3.6%-3.7% through 2021.
So why could that be a negative? Well, the purchasing power we talked about has increased demand in an already inventory-tight market. That demand caused Fannie Mae economists to reassess their forecast for 2020 and they are now predicting that home prices will rise at a 4.6% rate this year. Originally, they had forecast a 4.1% home price increase.
Even though December's numbers show a 13-year high for housing starts with 975,000 housing starts predicted, those homes may not be affordable for the segment of the population itching to buy. Fannie Mae's forecast shows the median price for a new home to be $327,000 in Q1 building up to $352,000 in Q4. The prediction also shows median existing home prices at $265,000 in Q1 with a spike in the spring and summer months to $291,000. Despite lower mortgage rates, that price range excludes a lot of first-time homebuyers who are more likely to purchase a home at or below $225,000.
