Fitch: Residential Prices to ‘Slow Modestly’ in 2018

Fitch Ratings, New York, said U.S. residential price growth will slow modestly to 5% with price-to-income ratios close to the 25-year average.

The company’s Global Housing and Mortgage Outlook noted, however, several cities in the West are “overvalued” and are likely to experience slower growth or a modest correction.

“The rate of price growth in the U.S. has been uneven,” said Fitch Managing Director Grant Bailey.

The report said areas in the West are experiencing “much more rapid growth” than areas in the Northeast. Prices in California, Arizona, Nevada and Washington have increased over 50% since 2012, while average prices in New York, New Jersey and Massachusetts are up less than half that figure over the same period.

Despite the increase in home prices, Fitch said affordability in most areas remains relatively strong by historical standards. The U.S. price-to-income ratio is near the 25-year average, although an increase in mortgage rates and a potential revision to the tax treatment for mortgage interest deductions could put negative pressure on affordability.

The forecast for 10-year bond yields (which are strongly correlated with mortgage rates) is above market consensus, projecting 70 basis point and 75 basis point increases in 2018 and 2019, respectively.

“As rates rise, refinancing volume will slow for banks,” the report said. “To maintain volume, they may lower standards from the very conservative levels of recent years. Borrowers tapping home equity may seek second liens and home equity lines of credit as more lenders re-enter this market.”

The report noted six of the top 10 lenders by volume are now non-banks, compared to two in 2011, and some are active in the non-prime space, lending to borrowers with recent foreclosures or bankruptcies or higher debt-to-income ratios who carry less risk than legacy Alt-A or subprime loans.