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Posted On January 03, 2019
2018’s year-end data showed housing activity has started to slow. With both existing home and new home sales falling, there are finally less buyers competing on the crowded market. After six years of sustained price gains, home price appreciation started to slow this year, dipping below 6% for the first time in six years. Managing director and chairman of the index committee at S&P Dow Jones Indices, David Blitzer, predicted, “throughout next year, prices will continue to rise on a national basis in most cities around the country, but the pace of increase will continue to slow.” This trend could be welcome news for home buyers, especially first-time home buyers.
With the Financial Crisis in our not-so-distant memories, discussion of housing market slowdown has left some fearing the worst. However, recent housing trends are not likely signs of another Great Recession. Stricter underwriting standards and responsible lending practices enforced since the Financial Crisis will likely prevent significant financial turmoil from happening again. Bloomberg contributor Conor Sen suggested in a recent op-ed, “housing market fundamentals in [today’s] cycle are nowhere near as risky as they were in the mid-2000s.”
In 1994, the Federal Reserve raised the benchmark interest rate from 3% to 5.5% over the course of the year. Mortgage rates reacted, averaging about 9% by the end of the year. New home sales plummeted from a seasonally adjusted annual rate of 812,000 homes to 629,000 homes from December 1993 to December 1994, a 20% drop. More recently, the Federal Reserve has raised interest rates nine times over the course of four years. This gradual approach to interest rate policy has led to less significant mortgage rate increases.
Housing professionals actually expect affordability to improve in the coming year, especially in terms of home price appreciation. While the Federal Reserve is still expected to raise interest rates next year, the pace will be less frequent. Mortgage Bankers Association (MBA) chief economist Mike Fratantoni explained that after a couple years of rapid home price appreciation, buyers will catch a break, stating, “If you’re a buyer in 2019, you won’t see home price running away from you at the same speed in 2018.”
Recent increases in loan limits will also give home buyers more buying power when they seek mortgage financing. Late last year, the Federal Housing Finance Agency (FHFA) announced an increase in conventional conforming loan limits to increase accessibility to home financing.
While a “housing market slowdown” has some reminiscent of the Financial Crisis, economists interviewed by Yahoo Finance predict the “slowdown will stop short of a crash.” Trulia senior economist, Cheryl Young said, “for the first time we’re not seeing home price skyrocket, so maybe there’s some small silver lining for those who have been frustrated with the housing market.”