The expected rise in mortgage interest rates for 2019 will create a domino effect on every major way that consumers interact with the housing market in 2019, including the affordability of both buying and renting a home, and even the commutes of workers across the country, according to a new forecast for the 2019 housing market authored by Aaron Terrazas, director of economic research at Zillow Research.
The 30-year, fixed rate mortgage interest rate will reach 5.8 percent in the new year, which is a level not seen since the midst of the 2008 financial crisis. Zillow writes that the increase in rates will “compound the effect of still-rising home values,” resulting in generally less affordable home ownership. Right now, rising mortgage payments are eclipsing gains to home value, which Zillow says can both “encourage homeowners to stay put – to hold onto low mortgage rates that are disappearing in the rear-view mirror – and discourage would-be first-time home buyers.”
The rising mortgage rates will also affect renters as well as buyers, they predict, because of their effect on the affordability of buying. Potential buyers, they say, “will be too financially stretched to buy and will continue renting. As a result, recent (and very slight) drops in rent will reverse and turn positive again.” They also add, however, that this shift will be mitigated somewhat by developers across the country investing more and more in apartment construction, which will prevent rent payments from increasing “too far above income growth.”
Another negative effect of the rising interest rates is centered on workers’ commutes. Because much of the engine behind recent job creation gains has been focused in the nation’s urban centers, so has a crisis of home affordability. Because of that, many younger families are naturally settling in more suburban areas. Because of this, they write that “the disconnect between urban jobs and suburban residents will continue in 2019 and contribute to longer, more crowded commutes.”
They add that this will likely be exacerbated by people who already have inflated commute times so that they can live within their means while working in a population center, providing an examples through homes in central Boston and Washington, D.C. A central Boston home is, “valued 303 percent more per square foot than a typical outlying home, while the premium for homes in central Washington, D.C., compared to outlying areas is 218 percent per square foot.”
While representatives in the Senate and House talk a lot about allocating more federal funds to infrastructure development, Zillow adds that this may be “too little, too late” due to rising construction costs and planning delays.
The increasing prevalence of homes claimed by natural disasters is also expected to have an effect on the market’s outlook for next year, with recent incidents relating to the fires in Northern California and the year’s flood losses cited by the outlet.
Finally, Zillow predicts that a mitigating effect on rising mortgage interest rates will be slower growth for home values. “Zillow forecasts growth of 6.4 percent from October 2018 to October 2019; a Zillow survey of housing experts and economists anticipates a 3.79 percent increase for calendar 2019,” Zillow writes. This leads to a prediction that both forecasts indicate “cooling” from a major period of growth seen in March, 2018 of 8 percent.
For all the details behind Zillow’s predictions, find their report by clicking here.
Written by Chris Clow