Five Forces Shaping the Housing Market in 2020

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What is the most likely scenario for the housing market for the next 12 months? Fortunately, we’re starting the year off with unemployment at a 50-year low and mortgage rates well below historic norms. All things considered, favorable conditions are set to support a healthy housing industry, even in the face of major challenges such as a shortage of affordable homes and a historically low home ownership rate among people in their 20s and 30s.

We believe these five factors will shape the mortgage sector this year:

1. Mortgage rates are likely to remain low and may even decline.

2. Affordability will continue to be better than it was in the late 1980s and 1990s.

3. The housing shortage will start to ease.

4. Buyers will increasingly move to more affordable areas.

5. Hot real estate markets will develop around community hubs.

We lay out our case for how these five forces may play out and consider how they could impact your business.

Mortgage Rates

We expect mortgage rates to remain relatively stable — fluctuating modestly around today’s levels, based on changes in the financial market’s economic growth expectations. The Chairman of the Federal Reserve has made it clear that short-term interest rates will not increase short of an extended period of much higher inflation, which is very unlikely. Goldman Sachs forecast that mortgage rates could increase a quarter point this year but, if global economic conditions or geopolitical tensions worsen, rates could easily decline over the next 12 months. Let’s review next what some of the best forecasts in our industry are saying.

According to Freddie Mac’s December forecast, fixed-rate mortgages will average 3.6% in 2020. This would be the lowest annual average recorded since Freddie Mac started keeping records in 1973! The average fixed rate was 3.9% in 2019 and 4.5% in 2018. Of course, the lower rates last year are why more U.S. homeowners refinanced their properties in 2019 than at any time since 2016. There are still many homeowners, however, who have not yet taken the opportunity to refinance. Importantly, home equity is at record levels, creating more incentive for cash-out refis.

Fannie Mae’s forecast is for refinances to decline to $672 billion this year (from $754 billion in 2019), but there is a good chance the refinance market could exceed this forecast. Many lenders were so busy with refis during the summer and fall, some customers were discouraged from applying due to processing backlogs. As a result, there’s still pent-up demand from homeowners wishing to lower their mortgage rates. After all, some homeowners who refinanced within the past two years could benefit from refinancing yet again. According to MarketWatch, 82% of loans originated six months to 25 months ago could benefit from refinancing.

Interest rates are a powerful mechanism for the mortgage market. Mortgage rates near today’s relatively low level, if they hold throughout 2020, could bring many positive impacts:

  • Increasing buying power, enabling purchasers to get more house for the same payment.
  • Inspiring builders to construct more homes.
  • Boosting home purchases, even with the challenge of limited supply.

Reflecting these advantages for the mortgage market, Fannie Mae’s latest forecast calls for purchase originations to increase slightly to $1.3 trillion in 2020 from $1.2 trillion in 2019.

The direction the housing market takes in 2020 will be strongly influenced by Millennials, the largest group of homebuyers at 37% of the market.

Unfortunately, the home ownership rate for this age group will likely be lower than previous generations, just because of the nature of work, which is concentrated in urban centers, and the prevailing view that many Millennials are more interested in flexibility and in experiences over possessions.

In general, however, surveys suggest aspirations for home ownership are still there and some Millennials are acting on that, especially once they get married and have children. The trend is positive: In the third quarter of 2019, 37.5% of Millennials owned homes, up from 36.8% a year earlier and the largest share since 2011, according to a Wharton Business Daily report.


Thanks in part to lower mortgage rates, housing affordability in most states is actually better now than historic norms. While this is surprising since many find the current environment challenging, middle-income homebuyers could actually be spending a smaller share of their income on housing than during the 1987–2004 period, which many analysts regard as a fairly “normal” period for the housing market, as shown by Figure 1.

Figure 1: Estimate of the % of Median Income Needed to Make Monthly Payments on a Median-Priced Home, U.S. Overall

Figure 1 shows the ratio of (monthly payment needed to purchase the median house) ÷ (median household income), akin to a Debt-to-Income (DTI) ratio for just a mortgage payment. We assume a 10% down payment, the Freddie Mac 30-year fixed mortgage rate plus 0.75% to cover mortgage insurance, risk add-ons and average property taxes and insurance. This affordability measure is just a calculation and is not based on actual loans. State-specific values are shown in our housing newsletter at

When we measure the percentage of median income needed to purchase a median-priced home, more than 30 states are more affordable today than during 1987–2004. There are exceptions, notably in states like California, Colorado and Vermont, but across much of the country, median-income earners are finding affordable homes, though the competition for the few available properties at lower-price points can be intense.

On a national basis, we estimate it would take about 29% of a median household’s income to make the monthly mortgage payment (assuming 10% down) on a typical home — substantially less than the 34% average in 1987–2004.

There remain major problems, from student debt to growing income inequality, so renting will remain popular as the population of people in their 20s and 30s grows. Home ownership may also be delayed compared to prior generations as the average age of getting married and having children has increased.

The Housing Shortage Will Ease

The housing market is underbuilt by 1 to 2 million units, based on factors such as population growth and obsolescence over the past decade. This creates a bottleneck, as a lack of available homes forces potential homebuyers to stay put and the few homes available are subject to bidding wars that drive up prices.

New construction never fully recovered from the housing crash. According to the National Association of Home Builders, nearly twice as many homes were being built annually over the two previous decades. In the 1990s, there were 11 million new homes constructed vs. 6.8 million in the 2010s. So it is not surprising that the pace of new construction jumped to a 13-year high in December, but it will take years to overcome our current housing shortfall.

After focusing on luxury homes, it appears builders are finally increasing the supply of homes first-time buyers can afford. In November, single-family homes and townhouses priced at $200,000 to $299,000 comprised about 34% of all new home sales through the first 11 months of last year, up from 30% in 2017 and 2018, U.S. Census Bureau figures show.

A NAR report found inventory was more restricted at lower price points, as low mortgage rates motivated buyers to snap up more affordable homes. NAR’s lowest price segment — under $200,000 — saw an 18% drop in listings year-over-year in November, while homes between $200,000 and $750,000 dropped a more modest 10%.

Inventory fell in 47 of the nation’s 50 largest metro areas and the drop was most significant in tech-oriented West Coast markets — San Jose and San Francisco in California and the Seattle, Washington, metro area each saw 30% declines in listings.

When supply is limited, home prices are likely to trend higher. The average probability of home prices being lower in two years nationally declined in the most recent quarter to a very low 10%, according to the Arch MI Risk Index®, a statistical model that uses nine indicators of local housing market conditions, including estimated home price over/undervaluation, unemployment rates and home price momentum.

Moving to Affordability

A recent analysis for The Housing and Mortgage Market Review® (HaMMRSM), published by Arch Mortgage Insurance Company (Arch MI), found home prices in some smaller regional cities are growing faster than in many of the large metros that experienced more rapid home price appreciation in 2019.

Cities with the highest home price appreciation in the third quarter of 2019 included Chico, California (14.4%); Jacksonville, North Carolina (12.8%), and Boise City, Idaho (11.8%). Generally, those communities are more affordable than the cities that topped the list a year earlier.

For decades, consumers reacted to high home prices in cities by moving farther out in search of more affordability. Red-hot growth in some smaller communities suggests an increasing number of potential homebuyers are leaving large cities like Los Angeles, and New York City altogether to move to smaller communities that offer a more family-friendly lifestyle and homes within their budget — and without the lengthy commutes. Many are willing to move across state lines, fueling a boom in the parts of the Mountain West, Florida and Texas.

Based on average income, just 2% of Millennials can afford a home in San Diego, California, and just 13% can find an affordable home in Boston, Massachusetts, according to a study. However, Millennial homebuyers can afford more than one-quarter of homes for sale in Oklahoma City, Oklahoma; Durham, North Carolina; and Salt Lake City, Utah.

Hot Real Estate Markets

Downtowns and hubs within suburbs will likely continue to outperform the overall market. Central business and entertainment districts — and similar areas in suburbs — are booming in the fastest-growing metros.

Many families have been priced out of neighborhoods in large cities, but still want homes within a short walk to shops and eateries. Increasingly, suburban communities that have an urban feel, thanks to amenities such as wide array of restaurants, are very hot.

As this trend strengthens, it’s likely we’ll see builders redevelop aging shopping centers to create ground-floor restaurants with apartments or condos on the second floors. Increasing numbers of people prefer a lifestyle with less driving. As a result, suburbs that are more walkable are experiencing more growth and price appreciation and we are seeing expanding efforts to improve sidewalks and bike paths.

Taking all of these factors into account, we can look forward to a solid year for housing with confidence: Our industry is in the midst of an era characterized by high loan quality and solid affordability (even though it doesn’t feel like it) in most of the country. In short, we predict moderate growth in mortgage purchase originations in 2020 based on stable to increasing home sales, while relatively stable mortgage rates should support decent, but not blockbuster, refis. Some hot geographic trends are expected, such as migration to more affordable booming metros and strong home price growth in suburban areas that have an attractive urban vibe.

Ralph DeFranco, PhD

Global Chief Economist, Arch Capital Services, Mortgage Group
Ralph DeFranco is the author of The Housing and Mortgage Market Review® (HaMMR℠), Arch MI’s quarterly report on the nation’s housing sector and the economic issues that affect it. His complementary Housing Update webinars are popular and you can learn more at

DeFranco leads the company’s forecasting of regional housing prices, base and stress scenarios and regional housing market risk. Ralph has both a Ph.D. in economics and a B.A. from the University of California at Berkeley, and experience in mortgage risk management at Chase and Freddie Mac.

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