Historically low mortgage rates spurred single-family home prices at the end of 2019, with the biggest gains in cities like Phoenix, Charlotte, and Tampa. 

The S&P CoreLogic Case-Shiller National Home Price Index released Tuesday reported a 3.8% annual gain in December, up from 3.5% in November, ending the year with the fastest growth rate since February 2019. The 20-City Composite had 2.9% year-over-year gains, up from 2.5% the previous month, and the 10-city Composite had an annual increase of 2.4%, up from 2.0% in November.

“Housing is one of the hottest sectors of the economy right now ever since the Fed loosened policy last summer/fall,” said Troy Ludtka, economist at Natixis CIB.

While the decline in mortgage rates is helping to boost prices and construction, supply is yet to meet the demand and most of the action is in lower-priced cities with fast-growing economies. Economists expect the market to remain strong despite global economic threats.

Mortgage rates began steadily decreasing in November 2018.  A trend that is in-line with the change of direction in the federal funds rate, which after 3 years of sharp increase, went into a steep decline in July of last year.

The positive effects of the lower federal funds rates are visible across all housing indicators. Construction skyrocketed, housing starts had an average annual growth of 32% in the last 2 months, yet housing supply remains tight.

“It takes a while before homebuilders can ramp up the supply to meet the demand,” says Stan Shipley, an economist at Evercore ISI, in regards to the elasticity of the housing supply. Years ago, home developers’ biggest challenge was access to capital, now it’s labor and lack of land. 

Metropolitan cities such as New York and LA are constrained geographically and by restrictive zoning laws, making it difficult to increase construction. Economists say this is a reason people are migrating to secondary markets. City dwellers are not the only ones relocating. Factors such as increased economic growth and low tax rates attract people from smaller towns as well.

 Phoenix had the greatest increase in year-over-year single-family housing prices with a 6.5% rise, Charlotte had a 5.3% gain followed by Tampa with a 5.2% increase. 

December and January were great for construction, according to Francis Généreux, senior economist at Desjardins Financial Group. He predicts that the positive trend will carry throughout 2020, at least during the first half of the year. 

“Will this trend slow down at the end of the year? With uncertainties over elections, or global economic issues, I’m not sure it will continue as fast as we’re now seeing,” said Généreux.

The Coronavirus outbreak has not impacted the housing market yet, however, it’s a risk that housing experts are watching.

“If you’re scared for future economic conditions, if you’re scared the virus might spread, you’re not going to look for homes, not when you’re worried about the economy at your home,” says Shipley.