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U.S. Economic Outlook: May 2016

Single-family Housing: Entering a ‘New Normal?': Purchase Lending To Dominate; Sales ‘Turnover’ May Be Less Than in Past

Frank Nothaft    |    Videos


The single-family housing market has taken a long time to fully recover from the Great Recession. While projections for this year show further gains in single-family volume, when will the market get back to “normal,” and what does that “normal” look like?

Let’s start with interest rates. Today’s rates have gone retro (Figure 1). We have now had more than eight years with mortgage rates well below 6 percent, and most forecasts have rates remaining below this level as far as the eye can see. Our nation has not had such a lengthy period of low mortgage rates since bumper stickers read “I like Ike.”

Mortgage Rates Go Metro

Mortgage Rates Go Retro

Even though mortgage rates are projected to remain relatively low, they are also projected to rise from today’s very low levels. A rise in interest rates, combined with the large amount of refinancing that has already taken place, will reduce future refinance activity. Instead of the 70/30 refinance-to-purchase mix that has been the norm since 2000, the “new normal” may turn that on its head and transport us back to a future that is predominantly purchase originations (Figure 2). And those households who will want to convert some of their home equity into cash will increasingly seek out home equity loans rather than refinance their low-rate first mortgage.

Purchase Money Dominates in the New Normal

Purchase Money Dominates in the New Normal

And what pace of home sales might we see in the “new normal”? Home sales in 2016 are projected to be at the highest level since 2007, but are still expected to remain below the pace prior to the housing boom-and-bust. If we look at the level of home-sales turnover, in other words, home sales measured relative to the housing stock, sales this year are projected to remain more than 10 percent below the sales pace in each year from 2000 through 2003 (Figure 3). Sales turnover may have evolved to a “new normal” with a slower pace.

The causes of a slower sales turnover are varied. Changes in technology and the modern office may have contributed to lessened labor mobility. The peak birth cohorts of the Baby Boom generation are now aged in their late 50s – often an age when household mobility is less. Senior households are living longer and prefer to age in place. Over four million households remain underwater and are reluctant to sell at a loss, and many others have had their adult children move back in with them. These and other factors may translate into a normal sales turnover pace that is slower than before the housing boom-and-bust.

Home Turnover Is the New Normal Slower

Home Turnover Is the New Normal Slower

In coming years, the “new normal” in the housing market may well feature these three elements: continuing low levels of mortgage rates (albeit higher than today); a lending market dominated by purchase-money and with a growing amount of home-equity loans; and a sales-turnover pace that is lower than the industry had been accustomed to.

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