Editor’s Note: This feature originally appeared in the August issue of DS News.
Sam Khater spends his day ensuring that Freddie Mac’s economics and research team delivers valuable insights and analysis on economic trends and policy issues affecting Freddie Mac and the housing market. With over 20 years’ experience in housing and economics, Khater brings extensive housing finance research and expertise to his role to Freddie Mac, which he joined after 11 years at CoreLogic. At CoreLogic, his responsibilities included producing original research and advising clients, regulators, policymakers, and investors on real estate and mortgage market trends. Before joining CoreLogic, Khater was a senior economist at Fannie Mae and an economist at the National Association of Realtors. He holds a master’s degree in network economics from Georgetown University and a bachelor’s degree in economics and finance from George Mason University.
What housing market trends do you see emerging in the second half of this year?
There are two key trends we’re seeing in 2018. One is the rise of the first-time homebuyer. As the economy gets stronger and rates, as well as home prices continue to rise, many potential first-time homebuyers are realizing that now is the best time to jump into the market before it gets more expensive; especially since we see no end in sight regarding the increase in home prices.
Another emerging trend that the market has experienced over the past year is the emergence of secondary and tertiary cities as hot housing markets that are beginning to see home-price growth accelerate. This trend has picked up mainly due to the growing unaffordability of the coastal markets and buyers are looking at these new markets to bridge the affordability gap. Some of the new markets that have seen exponential growth during the year include Denver, Provo, Nashville, and Austin. More recently, Reno and Boise have had a sharp run-up in home price growth.
Do you see the headwinds related to affordability and inventory shortages continuing into the next year?
Inventory shortage and the squeeze on affordability will continue to impact the market in 2019. The chronic shortage of inventory is the biggest hurdle the housing market and as an extension, the economy, is facing. I don't see that changing anytime soon. Despite home sales rising at a good clip on a year-over-year basis, the construction of new housing is barely above the recession level. We’re just not building fast enough to keep up with the pace of demand, even though we are nine years into the economic expansion. The affordability squeeze is related to the shortage in supply. The inventory crunch is causing a consistent increase in home prices in the order of 5–6 percent, and that's well above approximately twice the growth in income, causing affordability problems particularly on the coasts.
There has been a steady hike in mortgage rates since the beginning of 2018. Are you seeing these hikes impacting buyer sentiments?
Consumer confidence has remained high despite rate increases. Looking at the demand for purchase credit and its growth rate, it’s still roughly at the same level it was last year. The year-over-year increase in purchase applications that we look at quite closely has also been growing, indicating that rising rates have not impacted homebuyer sentiment.
Freddie Mac recently published a study on how mortgage-rate comparisons can save money for borrowers. Can you share some of your findings?
The key takeaway of this study was, for a typical $250,000 loan the expected savings from just one additional quote is about $1,400 for 80 percent of the borrowers who obtain mortgages. If you look at kind of the range of savings, a little over three-quarters of all borrowers who obtain an additional rate offer, save between about $1,000 and $2,100 on their mortgage.
That’s a substantial amount of saving, given that there’s a very strong demand for low down-payment products. For example, if a borrower is looking at a home price of $250,000, with a 3 percent down payment that translates to a down payment of around $7,500. Now, if that borrower compares rates and saves $1,000 to $1,400 on the mortgage, that’s a substantial saving on a down payment that’s so small, especially for an entry-level borrower. If a borrower is more aggressive in their search and gets five quotes, then their expected benefits increase to about $2,900.
What economic factors will determine the health of the housing industry towards the end of 2018 and going into 2019?
Inflation would be the biggest factor by far, because the fear of rising inflation is what’s driving the run-up in rates. The economy is running hot, and the Federal Reserve is being hawkish on inflation.
Today, the Fed is trying to get income growth higher via a low unemployment rate. The danger with that is, that if the economy runs a little too hot, then it starts to generate inflation that's above the 2 percent rate that the Fed is comfortable with. Today, inflation is at exactly 2 percent. However, the biggest factor in 2018 —and even in the first half of 2019—would be to see if inflation continues to grow at roughly the same pace or if it increases. If inflation increases, mortgage rates will go up, adding to the headwind of inventory and increasing prices that buyers are already facing.
The growth in income can somewhat taper the impact of rising mortgage rates, because if the economy is growing well, then it’s also generating income growth that will help buyers sustain the increased costs of purchasing a home. But, if inflation rises because of geopolitical reasons or a rise in energy costs, then the economy, as well as the housing market could face a problem.
Speaking about buyers, we’ve seen an active millennials homebuyer market this year. What is driving this trend?
One clear driver is that millennials are aging. We keep thinking of them as being young, but the truth is that the largest age cohort in the U.S. today is 28 years old—which is the peak of the millennial age-group. As a result, this group has been in the prime renter age for the past
five years and are now moving into their prime first-time homebuying years. This group will be a strong driver of the market over the next three years. Apart from it being a natural progression, today’s job market is another major factor that’s driving more millennials to buy homes. The job market has been very strong for this generation over the past three to four years and along with financial products that target millennials, such as low downpayment products like Freddie Mac’s Home One, make it a little easier for first-time homebuyers to become homeowners.