US Housing Sector Responded Well to Lower Mortgage Rates

“Mortgage rates dropped below 4% this past year in the U.S., and this opened the door for many people to refinance current loans. The solid economy and strong employment numbers also fueled sales of new homes. In 2020, expectations are that the boom in refinancing will fade out and home sales will increase, but high construction costs will keep housing affordability at bay for many, according to experts.” (Sam Khater, What’s Ahead for the U.S. Housing Market in 2020? Jan. 17, 2020)

The US housing market revived significantly in the final months of 2019 and is poised to boost the economy again in 2020. 

Behind this new development are relatively low mortgage rates, a strong job market with rising wages and national unemployment hitting at a 50-year low. 

Even though housing expenditures directly represent only about 5% GDP, these expenditures have positive spillovers into other sectors, and are also an important bell weather of consumer confidence. Think of the related expenditures on fixtures, appliances, etc. As well, a house purchase often represents the single largest purchasing decision most families ever make. 

Last year there was a pronounced slowdown in US home sales and prices, particularly in the first half of the year. The 2019 slowdown was probably due to the run-up in mortgage rates that occurred in late 2018 and early 2019. However, as mortgage rates fell in the second half of 2019, they triggered a strong rebound in home sales,

Overall US home sales in 2019 reached 6 million, and it is likely that sales will rise to at least 6.2 million this year. 

Clearly the Fed’s lowering of interest rates last year revived consumer interest in upgrading and increased home sales.

What has been the case for a long time is that the biggest obstacle the American housing market faces is the lack of supply. The reality is that the inventory of existing homes for sales continues to shrink.

Construction of single-family homes is yet to appreciably pick up, but the multifamily market is experiencing a stronger level of construction activity. The chronic shortage of housing availability provides sellers with unusual leverage in the marketplace.

As for the recent picture, home sales rose 3.6% to a 5.54 million pace in December. Housing starts reached a 13-year high in December and builder optimism is holding near 20-year highs. 

With the job market so strong and likely no increase in mortgage rates in the near term, the American housing market is clearly in for another strong gain this year.