MICHELLE MEYER: With Rising Prices And Mortgage Rates, Housing Affordability Has Peaked

michelle meyer

The recent surge in mortgage rates has hit mortgage refinance applications pretty hard. But the good news is that it hasn’t hurt purchase applications yet.

The weekly MBA purchase applications announcement out Wednesday morning should give us more of an insight on the issue.

Bank of America’s Michelle Meyer writes that with rising home prices and mortgage rates, housing affordability has peaked. But that housing is a “better investment.”

But this is just one of five hot housing topics that Meyer thinks investors need to watch.

2. Rising home prices and mortgage rates suggest that affordability has peaked.

Mortgage rates have pushed higher with the 30-year fixed rate up to 3.8%. Rising mortgage rates and home prices have 'marginally reduced affordability.'

The affordability index has peaked and there is concern that this could impact home sales. But this would only really impact sales if interest rates continue to rise rapidly. The recent divergence in home sales and affordability can be attributed to lower home price expectations, high unemployment and tighter credit conditions, writes Meyer.

Source: BAML

1. The collapse in lumber prices doesn't signal a collapse in housing starts.

Lumber prices have fallen recently and because its price reflects demand and supply dynamics some argue that it is forecasting a collapse in housing starts.

But Meyer thinks this is unlikely for two key reasons. 1. Lumber prices are historically very noisy and the decline in prices is 'consistent with the typical volatility in the data.' 2. Lumber prices had far outpaced housing starts. 'The decline in lumber prices actually brings it more inline with the trend in housing starts. We believe that prices had increased too rapidly and were divorced from fundamentals.'

Meyer projects housing starts just shy of 1 million in 2013.

Source: BAML

3. Demographic trends suggest a decline in average household size.

'An ageing population suggests a continued downward trend in the average household size due a greater share of 'empty nesters,'' writes Meyers.

'This is reinforced by the decline in birth rates; the Census Bureau estimates the birth rate will fall from 2.0 to 1.91 by 2060. Moreover, marriage rates have been heading lower. The decline in household size should led to a reduction in the average size of the housing stock.'

With millennials accounting for home purchases we could even see a move back towards cities.

Source: BAML

4. The rental vacancy rate has stabilised.

Following the housing bust, the number of renters increased by over 5 million between 2007 and 2012. This saw a homeownership rate of 65%, the lowest level since mid-1995. Household formation has helped support rental demand.

'We estimate that household formation undershot by 2.5 million over the past several years as a result of the weak economy,' writes Meyer. '...Many of these households will be buyers, but a good portion will also be renters, given the challenges facing the youth population in terms of student debt and access to credit. We continue to believe the homeownership rate will fall further, stabilizing around 63%.'

Rental vacancy rate is down from a peak or 11.1% in Q3 2009, to about 8.6% in the past four quarters. Rising vacancy rates for single family properties has offset the decline vacancy rates for multifamily properties. For now single family rentals are expected to outpace demand.

Source: BAML

5. More homeowners are being returned to positive equity.

Now look at 12 states where homeowners are still underwater...

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