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The biggest housing trends to watch in early 2020, from mortgage rates to construction

Bankrate logo Bankrate 1/14/2020 Natalie Campisi
a close up of a logo: quarterly housing trends © Provided by Bankrate, LLC quarterly housing trends

As we settle into the first quarter of 2020, experts are optimistic that the housing market will get stronger as the door cracks open a little wider for first-time homebuyers. This includes much-needed movement in new entry-level construction as well as the continuation of low interest rates. Both factors are important for homebuyers ready to buy, but unable to find affordable housing.

Homeowners also have something to look forward to in Q1: higher home values, which means an increase in equity, as home prices are expected to continue on their upward slope.

Interest rates are expected to remain low

Experts across the board forecast sub-4 percent rates in Q1, as the Fed is poised to maintain low interest rates. Low inflation will also keep rates down, says Greg McBride, CFA, Bankrate chief financial analyst. Rates for the 30-year fixed are expected to hover around 3.8 percent, which is good news for homebuyers and those who want to refinance their existing mortgages.

"Although it's difficult to predict the trajectory of interest rates due to the influence that the ever-changing news cycle has on rates, the Fed did unanimously vote to the leave interest rates (the federal funds rate) on hold, staying put between 1.5 percent and 1.75 percent through to the end of 2020," says Mark Turner, founder of Gold IRA Guide. "This can be regarded as a barometer of sorts, 2020 will be a fairly stable, low-interest-rate environment."

First-time homebuyers still face inventory shortage

The housing market just couldn't keep up with the demand for affordable single-family homes last year. But experts think the first quarter of 2020 will show some improvement.

New construction has begun to ramp up, says Odeta Kushi, deputy chief economist for First American Financial Corporation. "Builders are starting to build condos that replicate single-family homes in urban areas, which are more expensive, especially for younger homebuyers," Kushi says.

When it comes to the affordable housing shortage, in line behind lagging construction is homeownership tenure, Kushi points out. "Tenure length has become a problem in getting homes on the market. If there are 6.5 million home sales every year, about 6 million of those are existing homes. But if people are staying in them for 11 years, there are less existing homes," Kushi says.

About 1.6 million homes are being held off the market by Baby Boomers, so the big question is: will we see those folks downsize and open the dam for more inventory to be added to the market?

The latest housing starts report from MBA shows an annual increase in privately-owned housing starts. In November 2019, housing starts rose to a seasonally adjusted annual rate of 1,365,000, up from 1,202,000 a year earlier.

"2019 was another year of inadequate housing supply in relation to demand," said Mike Fratantoni, MBA senior vice president and chief economist, in a statement. "The good news is that the tide could be slowly turning for potential buyers. Housing starts and permits rose strongly in November, and homebuilder confidence has surged to a level not seen since 1999."

Saving for a down payment will still be a struggle for many homebuyers in Q1, experts say. Burdens like student-loan debt and increasing home prices will keep many first-time buyers on the sidelines.

"Student debt has been the biggest culprit in breaking into the housing market for new buyers," says Beatrice de Jong, consumer trends expert at Opendoor. "It's becoming very common for millennials to need financial assistance from their parents. Some parents have even moved into granny suites in back houses to stay close and help young families with their children. Communal living is becoming more popular out of necessity."

Is renting the new buying in 2020? Some experts say it depends on where you live.

Median home prices outpaced average weekly wages in 66 percent of 855 counties analyzed in ATTOM Data Solutions 2020 Rental Affordability Report.

The data shows that buying a median-priced, three-bedroom home is more affordable than renting a three-bedroom home in 53 percent of these metro areas. However, affordability tips toward renting in more densely packed areas.

In 69 percent of areas with a population of at least 500,000 or more, renting is more affordable than buying. Similarly, in 84 percent of the metros where the population exceeds 1 million, such as Los Angeles County; Cook County (Chicago); and Harris County (Houston), renting is more affordable than buying.

"Homeownership is a better deal than renting for the average wage earner in a slim majority of U.S. housing markets. However, there are distinct differences between different places, depending on the size and location from core metro areas," said Todd Teta, chief product officer with ATTOM Data Solutions, in a statement.

As housing inventory remains low, renting will likely be attractive for people in expensive housing markets or those on a budget in Q1.

Experts say that today's rental options provide a wide variety of amenities, without draining the bank account, which could put homebuying on the back burner for some folks.

"The quality of today’s rental stock is impressive - amenities like granite countertops, laundry services and dog parks are increasingly the norm," says Rick Bechtel, head of U.S. Residential Lending for TD Bank. "As such, some prospective buyers, who have become accustomed to the high quality of their rental property, may experience sticker shock when approaching the housing market and feel like they are paying more and getting less."

Expanded technology will help buyers and sellers

For those that can afford to buy, new technology is making it easier, faster and cheaper. The new decade will bring a more digital experience, as both large and small lenders adopt paper-free and blockchain technology.

"Technological advancements will expedite processing and underwriting. Additionally, there will be more movement towards digital marketing, ensuring that the right home is in front of the right customer at the right time," says Mike Hardwick, president of Churchill Mortgage Corporation. "With more movement towards consumer direct lending, we will see a well-designed digital experience for the consumer that will help us connect with them better earlier in the process.”

Similarly, iBuyer firms, which are investors or companies that use technology to evaluate homes often without ever seeing them, will help buyers and sellers buy and sell more quickly and easily in 2020.

"Over time, as more people become comfortable with the idea, this option could increase annual home sales and purchase mortgage originations by making it far easier to change homes," says Ralph DeFranco, global chief economist at Arch Capital.

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