Metrostudy’s National Residential Economic Report is a modeled forecast released quarterly of over- and under supply of housing in the nation, as well as over- and under valuation, which impacts the future of housing most significantly. The five-year forecast is further informed by recurring national indices that track construction starts, employment, and other key indicators, and provides Metrostudy a framework to forecast the future state of housing across the nation, and in major markets.

Key points from the third quarter report:

  • The national housing market is significantly under supplied, and shortages are expected to become more severe through 2020. Low supply of housing will support a continued surge in the remodeling/renovation market. The potential for rising rates in the future could also support demand in the remodeling market, as potential home buyers could be forced to remodel their home instead of purchasing new or existing homes for sale.
  • Mortgage rates haven’t risen significantly yet, but as inflationary pressures grow and mortgage rates rise, they could contribute to “severe over valuation in many markets,” despite projections for more modest price growth in the coming years.
  • Although the value of the national housing market is nowhere near the levels of over valuation seen in 2005 and 2006, the national market is heading toward over valuation, and some markets are already overvalued.

Job growth. National job growth continued at healthy levels during most of the third quarter, but ebbed in September in the wake of hurricanes Harvey and Hurricane Irma. Although the Bureau of Labor Statistics’ (BLS) September jobs report marked the first monthly decline in employment in seven years, employment is expected to rebound in the coming months, and unemployment reached the lowest level seen since 2001—4.3%.

Residential permit activity, housing supply, and new home starts. Metrostudy projects that permit activity (including both single-family and multifamily permits) will continue to increase over the next three years. Housing supply is expected to increase at a controlled rate during the same period. New home construction starts are also expected make continued gains over the next three years, peaking at approximately 1.5 million housing starts. Permits, housing supply, and new home starts are all projected to peak in 2020.

Fixed and adjustable mortgage rates. Mortgage rates have remained “surprisingly low” during the third quarter, with 30-year fixed rate mortgages hovering at a national average of 3.97%, 15-year fixed at 3.24%, and 5-year adjustable rate mortgages at 3.22%. Metrostudy projects that mortgage rates will rise slowly over the next three years due to inflationary pressures, but they’ve made a slight downward adjustment since their second quarter forecast. The Federal Reserve’s recent decision to pare down the balance sheet could also push mortgage rates up in the future.

Price appreciation. The S&P CoreLogic Case-Shiller U.S. National Home Price Indices (including the National index, 10-city composite, and 20-city composite) have followed an upward trajectory since 2012. The latest release reported home price gains at an annual rate of 5.9%, and framed the decline in new and resale home sales since last March as a potential indicator that sales are leveling off. Price growth is expected to slow over the next 5 years.

Third quarter housing model. Demand for housing will continue to climb over the next three years, peaking in 2020. Demand is currently outpacing supply, a trend that is projected to continue until 2023, despite the projected decline in demand. As of the third quarter, the housing market is under-built by approximately 1.7 million houses, a figure that could potentially double in 2019 and 2020 as demand increases. Metrostudy’s method for housing valuation—which weighs economic, socioeconomic and demographic fundamentals to forecast income-supported home prices—compared to historic/forecast home prices from sources like BLS and Moody’s analytics, shows that the national market has just entered a “mild period” of over-valuation, and over-valuation is likely to increase over the next three years. An extended period of low mortgage rates has allowed home prices (and land values) to rise higher and more rapidly than they should have. Rising mortgage rates may contribute to housing over valuation in many markets, despite only modest price appreciation being forecast for the next few years.

In this video, Senior Vice President and Chief Economist of Metrostudy Mark Boud gives a more detailed rundown of Metrostudy’s National Residential Economic Report for the third quarter of 2017. The report is also available for every major metropolitan market—access your market here.