BrokerageMarkets & Economy

Prepare clients for higher mortgage rates and other tips for next year’s market

Housing update from realtor.com chief economist Jonathan Smoke
  • The housing market may not be as strong next year as this year.
  • Low inventory, rising mortgage rates, and higher rents will mean lower housing affordability for buyers next year.
  • Real estate professionals should be aware of mortgage rate changes in their local market so they can better advise their clients.

KANSAS CITY — Real estate professionals should prepare their clients for lower housing affordability next year due to higher mortgage rates and low inventory, according to realtor.com chief economist Jonathan Smoke.

Smoke spoke at the Conference of MLS Financial Executives (CoMFE) put on by the Council of Multiple Listing Services (CMLS) last week.

The no. 1 economic indicator real estate pros should focus their attention on is mortgage rates, Smoke said. He predicts rates will hit 4.5 percent next year, up from around 4 percent this year. Such a rise would have shut out 6 percent of this year’s homebuyers, he said.

“I think the mortgage part is going to be the most important part for consumers going forward,” he said.

“There’s enormous variation in rates. They’re very dynamic. They change regularly. More people will be bumping up into debt-to-income ratios.”

He’s not suggesting real estate agents and brokers or any of the MLSs that provide them with tools and information become mortgage lenders, he said, but that they help homebuyers work through trade-offs and decisions.

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“Being aware and educated of what rates are doing in your local market is really important,” Smoke said.

“Part of the complexity has to do in guiding people on what kind of product might be most appropriate for them. Just that simple communication of what is the rate and what lender are you working with will expose that in a single market, there could be a 5 to 10 basis point variation. ”

It’s been a great year for housing, but next year may not be as strong as this year, he said.

Recent unemployment numbers point to a slowing economy, Smoke said. Even so, the risk of prices declining is “extremely low” even if there were an economic downturn, he said.

This is because inventory will continue to remain tight — pushing prices up — as it has been for the past 36 months, Smoke said.

Single-family home building is starting to pick up, but the market won’t see anywhere near the amount of “speculative construction” that has occurred in previous economic recoveries, he said. About a third of builders were lost during the downturn, and only big builders have access to public capital, he added.

Such builders are “very disciplined,” he said. “We’re not going to see them rush in and drive up a lot of the construction. I seriously doubt we’re going to see a huge increase. [We’ll see] steady progress [instead],” he said.

In most markets across the country, it makes more financial sense to buy than to rent if people are ready to do that, but if they’re not, higher rents are going to be “horrible” for saving a for a down payment, Smoke said.

Check out Smoke’s presentation slides below for more on demographics, high-quality buyers, purchase impediments and hot markets.

Email Andrea V. Brambila.