The opening words of Charles Dickens’ 19th century novel, A Tale of Two Cities are eerily appropriate for today in the description of the economic forces which are affecting mortgage interest rates. “It was the best of times, it was the worst of times.”
The new Administration has consistently advocated general economic growth. This suggests that it might be the best of times to build or purchase a new home.
And yet, the Federal Reserve Board which sets monetary policy by raising or lowering its target for federal funds rates, raised rates in December 2016, and many experts believe there will be multiple increases in 2017. This leads some potential homebuyers to mumble that this could be the worst of times.
In fact, many economic analysts feel that Mr. Dickens was correct with both sentiments. In an effort to gain clarity on the question of interest rates and the vitality of the Denver home market, it is necessary to enlist the insights of an expert in construction industry trends.
An Economic Expert Weighs In
Robert A. Murray is the Vice President, Economic Affairs and Chief Economist for Dodge Data & Analytics, and he determines the broad forecast pattern used by the company’s information products. He also functions as the company’s chief economic spokesperson. Bob is frequently quoted by major newspapers such as The Wall Street Journal on industry developments, and his comments have also appeared in BusinessWeek, CNN, CNBC, FOX Business, Forbes, and other media outlets.
He is the author of the widely-circulated Dodge Construction Outlook—a seminal reference for the industry—and he serves as anchorman for Dodge Data & Analytics' prestigious Construction Industry Outlook Conference held in Washington each October. He also conducts a series of construction outlook seminars every spring and fall in various cities across the U.S. and Canada.
In the mid-1980s he directed a team of economists that developed the Construction Market Forecasting Service, providing five-year projections for 22 building types by nine regions of the U.S. This product has become the preeminent forecast of the nation’s construction industry, and it serves as the foundation for other construction and real estate forecast products offered by Dodge's Analytics group.
Reading the Tea Leaves on Interest Rates and Home Ownership
Mr. Murray has many resources and analytic tools at his disposal to help construction industry clients succeed in any market situation. He also has a keen intellect which makes him an ideal person to offer predictions for interest rate movement and building trends.
“Our general sense is with the Trump administration, the inflation rate will increase faster and with that, the interest rates will increase as well,” he said. “We track the mortgage rates at the national level and what we’ve seen is that (at the time of this interview) they are at about 4.1 percent for a 30-year fixed mortgage rate, and there is probably a little more room for them to move this year. However, I don’t think the major concern about mortgage rates will occur until we reach 2018. There are several reasons for this.
“First, it will take time for the stimulative measures of the Trump program to have an impact, and secondly, we are still dealing with a sluggish global economy which keeps the prices of commodities at restrained levels.
“Certainly, mortgage rates are higher than they were even one year ago,” Bob noted. “However, there are other factors that relate to housing demand. These would include such things as job growth and what’s happening to overall income levels in specific locales.”
Denver Homes are Overvalued
According to a report published in the Denver Post, Metro Denver home prices are more overvalued than at any time since the early 1980’s, but the chances of them declining over the next two years remain low. Home prices in the area during the third quarter (2016) were 22.1 percent overvalued given their long-term relationship to incomes. Bob offered some insights about this.
“Any time you look at markets that are overvalued, this is going to have some restraint on overall construction,” he said. “In the case of Denver, the question would be can these continue upward at the same rate. When one looks at the pattern of activity in terms of single family housing and multi-family housing over the past five years, there have been steady increases, but we are reaching a point where the rate of increase is beginning to decelerate.”
Supply and Demand
The supply of single-family homes in Denver is at an historic low and new homes are not being built fast enough to meet the demand. Is this having an impact on the price of homes in the market?
“Of course when the supply of homes is less than the demand, prices will rise,” he said. “However, from a more broad-based perspective, we are seeing a tightening of lending standards for financing multi-family housing. Developers have had a tough time getting loans for development.
“One of the interesting things proposed by the Trump administration is an easing of the Dodd-Frank regulations. If this happens, it should make it easier for developers to obtain funds.
“Another factor we have noticed around the country and specifically in Denver is the labor shortage,” he said. “As a result of the deep recession which occurred in 2009, many construction workers left the industry and a number of areas around the country are dealing with labor shortages. Given the controversy about immigrant labor, this could cause a tight situation to become even tighter.”
Custom Homes vs. Starter Homes
How will this increase in interest rates affect custom homebuyers? Bob explained.
“If we are talking about the upper end of the market ($800,000 - $2 million), which has been fairly strong, the people who have the income to afford these homes are not going to be adversely affected by mortgage rates moving up to 4.5 percent,” he said. “It’s important to remember that at the peak of the housing market, we were looking at mortgage rates of 6 percent, and going back twenty years, they were even higher than that.
“My feeling is that the increase in mortgage rates for the high-end market is not going to have that drastic of an impact given the income levels of the people making those purchases. The challenge we have had in getting the housing recovery going is due to the fact that most of the supply has been on the high end, rather than the middle or the low end of the spectrum. I believe housing developers need to focus on that portion of the market and provide attractive options for Millennials and other young buyers.
As noted in another Acme Brick post, homes constructed of brick have a higher resale value than other construction materials. Does this appreciation factor into the decision to build or buy a new home?
“I’m sure it does,” Bob said. “Fortunately, the costs of materials have not grown that much over the past several years. The important thing to remember about resale value lies in the fact that a market can only appreciate so far. There has been considerable price appreciation over the past few years. That being noted, the more one can make a house attractive and stand out from others in the market, the more it helps that property from a competitive standpoint,” he concluded.
If you’re thinking of building a custom home, now is a great time. Consider the advantages of brick construction: low maintenance, energy savings, security against fire and the look of old world charm. Contact Jay Cox at Acme Brick for more information.