A sharp rise in mortgage rates in 2018 (+95bp YoY) is negatively impacting homebuyer affordability and creating headwinds for parts of the housing market, including new housing starts and homes sales.
While some parts of the housing market will slow with higher rates, others should benefit. We expect higher rates will drive incremental demand for single-family rentals (SFR) as households find attaining homeownership more economically challenging.
We do not expect higher rates to materially impact the positive trends in new household formations, which should remain resilient due to continued demographic shifts and healthy economic growth.
While home price appreciation (HPA) and mortgage rates have historically exhibited little correlation, we expect HPA to decelerate from the recent range of 5% to 6% and forecast HPA of ~4% CAGR through 2023.
We believe the downside risks to home prices today are far lower than in 2006 due to more favorable current and projected supply/demand imbalances, less leveraged consumer balance sheets, and tighter mortgage credit conditions.