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MICHELLE MEYER: Housing Affordability Has Peaked
The recent surge in mortgage rates has hit mortgage refinance applications pretty hard.
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The weekly MBA purchase applications announcement out Wednesday morning should give us more of an insight on the issue.
Bank of America's Michelle Meyer writes that with rising home prices and mortgage rates, housing affordability has peaked. She does however think that housing is a "better investment."
But this is just one of five hot housing topics that Meyer thinks investors need to watch.
Lumber prices have fallen recently and because its price reflects demand and supply dynamics some argue that it is forecasting a collapse in housing starts.
But Meyer thinks this is unlikely for two key reasons. 1. Lumber prices are historically very noisy and the decline in prices is "consistent with the typical volatility in the data." 2. Lumber prices had far outpaced housing starts. "The decline in lumber prices actually brings it more inline with the trend in housing starts. We believe that prices had increased too rapidly and were divorced from fundamentals."
Meyer projects housing starts just shy of 1 million in 2013.
Source: BAML
Mortgage rates have pushed higher with the 30-year fixed rate up to 3.8%. "The combination of higher rates and rising home prices implies that affordability has peaked from the record highs reached earlier this year."
"If we assume no change in rates through the rest of the year, but account for an 8% rise in national home prices, the affordability index slips to early 2012 levels. If, however, we assume mortgage rates rise 100bp through the course of the year (with all else the same), the affordability index drops to early 2011 levels. In order to keep affordability constant with a 100bp rise in mortgage rates, home prices would have to fall 15% or income would have to rise 18%. Since neither of these scenarios seems likely, we think the affordability index will be heading lower."
The affordability index has peaked and there is concern that this could impact home sales. But Meyer thinks this would only really impact sales if interest rates continue to rise rapidly.
Source: BAML
"An aging population suggests a continued downward trend in the average household size due a greater share of 'empty nesters,'" writes Meyers.
"This is reinforced by the decline in birth rates; the Census Bureau estimates the birth rate will fall from 2.0 to 1.91 by 2060. Moreover, marriage rates have been heading lower. The decline in household size should led to a reduction in the average size of the housing stock."
With millennials accounting for home purchases we could even see a move back towards cities.
Source: BAML
Following the housing bust, the number of renters increased by over 5 million between 2007 and 2012. This saw a homeownership rate of 65%, the lowest level since mid-1995. Household formation has helped support rental demand.
"We estimate that household formation undershot by 2.5 million over the past several years as a result of the weak economy," writes Meyer. "...Many of these households will be buyers, but a good portion will also be renters, given the challenges facing the youth population in terms of student debt and access to credit. We continue to believe the homeownership rate will fall further, stabilizing around 63%."
Rental vacancy rate is down from a peak or 11.1% in Q3 2009, to about 8.6% in the past four quarters. Rising vacancy rates for single family properties has offset the decline vacancy rates for multifamily properties. For now single family rentals are expected to outpace demand.
Source: BAML
10.4 million homeowners or 21.5% homeowners with a mortgage were underwater at the end of 2012. A 5% rise in home prices could lift another 1.8 million into positive equity, according to CoreLogic.
The shift to positive equity is important for three key reasons according to Meyer. 1. Those in negative equity are more likely to default on their mortgage payments. 2. "There are many homeowners who are looking to sell but don’t want to realize a loss. The move into positive equity will “lubricate” the market, allowing these homeowners to sell and in many cases move to another property." 3. Positive equity will help in refinancing for borrowers that don't qualify for HARP (Home Affordable Refinance Program).
Source: BAML
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