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Higher finance costs will dog D-FW homebuyers in 2018

Home finance costs could rise to the highest level in eight years in 2018.

ORLANDO, Fla. — Homebuyers heading into the hot North Texas housing market in 2018 will have more to worry about than rising prices and a lack of inventory.

The cost of mortgages to buy that house is also going up.

Interest rates for long-term home loans are expected to rise from below 4 percent to 4.5 percent or more by the end of the year, top housing economists predict. And more mortgage rate hikes will happen in 2019, too, they expect.

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That would push housing finance costs to their highest level since 2010.

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"We are all expecting interest rates to move higher," said Frank Nothaft, chief economist with CoreLogic. At the housing industry's annual conference in Orlando, Nothaft said the increase in home mortgage rates will have a negative impact on the market.

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"It's not going to be just a gradual erosion of affordability, which is already very challenging in a number of high-cost markets," he said. "It's also going to impact homeowner mobility.

"If you are homeowner and you have a very cheap mortgage rate, that might dissuade you from putting your home on the market and moving."

It could further tighten already-constrained home inventories in many areas, he said at the International Builders Show. Dave Berson, chief economist with Nationwide Mutual Insurance, said multiple interest rate increases this year by the Federal Reserve will put upward pressure on home borrowing costs.

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"Long-term rates will go up a little bit more this year," Berson said. "We don't think that will slow the market.

"Demand remains fairly strong and the job market is solid. We still think home sales and housing starts will move up this year despite the increase in mortgage rates."

North Texas has one of the strongest home markets in the country.

In 2017, real estate agents sold a record 106,000 preowned single-family homes. Builders started almost 34,000 houses — the best construction total in a decade.

Nationwide housing starts hit 854,000 single-family units, an increase of 9 percent from 2006, according to the latest figures from the National Association of Home Builders. Home starts across the country still remain well below the more than 1.5 million in houses built in 2006.

D-FW home starts are still about 33 percent below where they were in 2006, even with last year's increase of more than 20 percent in building.

"Markets in the south where local economies are doing well — that's where we see the biggest numbers in new home sales," Nothaft said. "In particular Houston, Dallas, San Antonio and Austin are four of the markets seeing really significant homebuilding and sales."

He said Phoenix, Atlanta and Charlotte, N.C., are also enjoying a homebuilding boom.

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The National Association of Homebuilders predicts that 2018 will be the best year for home starts since the Great Recession.

"Single-family construction growth is continuing," said Robert Dietz, chief economist at the National Association of Home Builders. "For 2018, we see single-family starts up just about 5 percent to 893,000. That's well below what we think is sustainable."

He said despite several years of increasing construction, builders can't keep up with buyer demand.

"With homeowner vacancy rates going down and housing demand strong and homebuilder confidence at an 18.5-year high, why haven't we seen this uptick in building?" Dietz said. "A lot of it has to do with forces on the supply side of the market.

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"For the last three years, the top issue for builders has been the labor shortage, and that continues."

High land prices and rising costs of construction materials are also preventing many builders from serving the share of the market with the greatest potential: first-time buyers seeking affordable new homes.

"The hardest market is the entry level," Dietz said. "It becomes difficult to build in those $200,000 markets, and frankly, that's where the inventory is needed most."

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In North Texas, the median price for new houses at the end of 2017 was $345,000 — almost 70 percent more than the mid-priced new house that builders constructed in 2007.

For 2018, economists see more home price increases, but at a slightly slower rate than 2017. North Texas median home sales prices rose 9 percent last year.

"We think home prices this year will only be up 2.9 percent," Dietz said.

Core Logic is forecasting that nationwide home prices will grow about 5 or 6 percent, Nothaft said.

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"As demand rises because of the improving economy, that is going to translate into further house price growth," he said.