shifted dramatically. Market-based measures of expectations are now pricing in a significant probability that the next Fed rate move could be a cut rather than a hike.

was not unprecedented. My col- leagues at Freddie Mac have studied periods of interest rate increases and found that, following a period of sustained mortgage rate increases, home sales fell about five percent and housing starts fell about 10 percent. That isn’t too far from what we experienced with existing home sales in the fourth quarter of 2018, which were down eight percent from the fourth quarter of 2017 and housing starts were down about six percent over the same period. THINKING BEYOND THE BUSINESS CYCLE Mortgage rates declining in early 2019 is a reason for optimism about housing market activity, but there is more reason for optimism than just the short-term boost from lower rates. When we look at housing mar- ket activity, it helps to think beyond the business cycle. Statistical decom- position of housing market indicators reveals medium-term (8-32 years) and long-term (>32 years) trends are important drivers of housing market activity. These trends reflect demo- graphics that, over the long run, will dominate housing market activity. To think about this, we need to consider the housing market lifecycles of both the young and the old. The Millennial generation will drive housing market activity for years to come. They have been slow to start their housing lifecycle compared to earlier generations, partly because of sociological changes and partly because of economic factors. My colleagues and I examined the factors driving household formation and homeownership for young adults of the Millennial generation as com- pared to Gen Xers at the same age. We found that sociological factors, like delayed marriage and lower

fertility rates, were significant drivers of delayed household formation and homeownership among Millennials. However, these factors were dwarfed by economic factors such as de- clining labor force participation and higher housing costs. Our research showed that higher real housing costs explains almost half of the eight-per- centage-point decline in young adult homeownership rates for Millennials as compared to Gen Xers. On the other end of the age spec- trum, my colleagues at Freddie Mac looked at the housing choices of seniors. They found that seniors born after 1931 are staying in their homes longer, and aging in place, result- ing in higher homeownership rates for this group relative to previous cohorts. In total, seniors are hold- ing 1.6 million housing units off the market by aging in place. The boost in demand coming from the aging of Millennials and extended lifespan of seniors is putting pressure on a housing market that is unable to build enough homes. The result is continued pressure on house prices. Despite the recent moderation in house price growth, house prices are still outpacing incomes. Over the next few years, hous- ing demand will provide a boost to housing market activity. However, a significant longer-term risk is that the imbalance between supply and demand will trigger another house price bubble. The experience of the last decade shows that the inevitable collapse of a house price bubble is far more painful than the ebb and flow of the typical business cycle. • Len Kiefer is the Deputy Chief Economist at Freddie Mac and is responsible for pri- mary and secondary mortgage market analysis and research, macroeconomic analysis and forecasting. Kiefer is also involved in the analysis of policy issues affecting the housing industry. @LenKiefer


business cycle in the United States, and housing market indicators have also been flashing warning signs recently. Home sales, housing starts, and house price growth all declined last year. While single-family house prices increased nationally in 2018, some regional markets experienced declines in house prices with sharp declines in house price growth rates in many markets in the western Unit- ed States. For most of the economic recovery, residential investment was adding to overall GDP growth, but in the last three quarters, residential investment subtracted from growth. Fading housing market activity is a typical precursor to U.S. recessions, so many bearish analysts pointed to 2018 housing market indicators. The decline in housing market ac- tivity wasn’t too surprising when you consider what happened with mort- gage interest rates in 2018. At Fred- die Mac, we track mortgage market trends very closely. My team helps run the weekly Primary Mortgage Market Survey, which tracks the av- erage rate on several popular mort- gage products going back to 1971. By far, the most popular product is the 30-year, fixed-rate mortgage. After nearly hitting a five-percentage-point average rate last fall, rates have fallen to 4.12 percent in our survey for the week of April 11, 2019. The run up in rates last year was a significant factor driving the housing market slowdown in 2018, and this

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