Mortgage rates will remain stable for the next two and a half years, predicts an economist from the Mortgage Bankers Association. But the national housing shortfall continues to be a problem primarily because of the lack of building sites, according to the Urban Institute.

Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.

Six months ago, when mortgage rates neared the 5 percent mark and were expected to continue climbing, the real estate business was concerned that homebuying in 2019 would be a fraction of what it could be.

Now, though, rates have receded by 50 basis points (a basis point is 1/100th of a percentage point) and all is well. (If all is not well with housing more broadly, at least loan costs aren’t the reason buyers aren’t jumping in.)

And the outlook is for more of the same, says Mike Frantantoni, the chief economist at the Mortgage Bankers Association (MBA.)

“Rates are not going anywhere,” he predicted at the group’s annual secondary mortgage market conference in New York late last month.

Stability is key, of course, not just for realty sales, but also for mortgage originations. Any jump in loan rates throws both markets into a tizzy. And once things settle down, another increase starts the process all over again.

But Frantantoni doesn’t see that happening, perhaps not until 2022 at the earliest. Some unforseen economic happenstance could change that, of course. But for now, the economist is looking for rates to remain within a narrow band through this year and the next two.

Specifically, he is forecasting the rate on 30-year conventional mortgages to average 4.4 percent this year and 4.6 percent in each of the next two. Rates averaged 4.3 percent in 2017 but jumped up to an average of 4.8 percent last year.

“This time last year,” he told the conference, “we expected the Fed to keep increasing interest rates. But inflation didn’t come … now we are in a structurally different market than we were before.”

And because of what he called “very favorable demographics,” Frantantoni is looking for solid but not spectacular growth in the volume of purchase money mortgages, from nearly $1.19 trillion last year to $1.24 trillion this year, $1.27 trillion in 2020 and $1.31 in 2021.

“Despite a downward trend in mobility,” he said, “people are still getting married, having kids and taking new jobs.”

He is looking, too, for strong growth in household formations among millennials, a trend that he expects to continue through much of the 2020s. “A wave will move forward to generate demand for housing,” he said.

He added that the recent deceleration in price growth, plus stable rates will benefit first-time buyers.

Housing shortfall continues

Not that there aren’t some other flies in the ointment. The one that most bothers Laurie Goodman of the Urban Institute, a non-partisan Washington think tank, is the lack of supply of new homes, both now and in the future.

Goodman, who spoke on the same economic forecast panel as the MBA’s Frantantoni, pointed out that 1.28 million houses and apartments were built last year. But at the same time, she noted, 426,000 units were lost to obsolescence, leaving only a net gain of 855,000, including manufactured houses.

Comparing that to the nearly 1.2 million households formed last year, it’s easy to see why she is concerned. The supply of new homes necessary to meet demand fell short by 337,000 units — a third of a million.

As have numerous other economists, Goodman, who is the founder and co-director of the Housing Finance Policy Center at the Urban Institute, listed labor, land and lenders as the reasons builders are not building houses at the rates they should be. But, she added, the “most acute” problem is with the lack of building sites.

The cost of a lot is becoming more expensive than the house itself, she noted.

“The real villain in all of this, the single most important factor,” is the inability of developers to create lots at reasonable prices, she explained, noting that zoning and development rules are enacted at the local level and there’s not much federal authorities can do to change them. “Building codes are more stringent than they need be,” she said.

Bottom of the market is suffering

The shortfall, Goodman added, is having its greatest impact on the lower third of the market. Of the houses built in 2018, 24.6 percent were for the bottom tier of the market, 30.4 percent for the middle-tier and 44.8 percent for the higher tier. “There not enough building at the low end,” she said. Worse, perhaps, a whopping 54 percent of the country’s current housing stock was built prior to 1980.

In her wide-ranging presentation, Goodman also noted that the housing stock is aging rapidly. The average house was built in 1977, making it 42 years old. “We were building more houses in the 1960s-70s than we are now, and we were doing it with a smaller population,” she said.

In addition, the economist pointed out that as buyers’ credit scores have increased over the past 20 years, debt-to-income ratios have become “less significant, less predictive and less important” than credit scores and loan-to-value ratios.

And she noted, as others have, that a “significant portion” of the most risky mortgages are obtaining the backing of the Federal Housing Administration (FHA) as opposed to going through conventional channels.

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Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.

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