Following the housing market’s best year since the recession, existing-home sales are expected to increase in 2016 at a moderate pace; although affordability pressures from inventory shortages and rising mortgage rates could slow the potential for even stronger sales momentum, according to an economic forecast forum here at the 2015 REALTORS®Conference & Expo.
Lawrence Yun, chief economist of the National Association of Realtors®, presented his 2016 economic and housing forecast and was joined onstage by Cris deRitis, senior director of credit analytics at Moody’s Analytics, who also shared his insights on the housing market and U.S. economy, and Jonathan Corr, president and CEO at Ellie Mae, who discussed issues impacting the mortgage industry and how real estate professionals can adjust to the upcoming wave of new millennial buyers.
According to Yun, the pent-up demand for buying in recent years finally broke out in a meaningful way in 2015, fueled by sustained job growth in many parts of the country and rising home values giving more homeowners the incentive to sell – a trend that he expects to continue next year.
“Sales activity in 2016 will once again be primarily driven by the ongoing release of more pent-up sellers finally realizing their equity gains and using it towards the down payment on their next home,” said Yun.
With demand expected to remain stable through the final two months of the year, Yun forecasts home sales to finish 2015 at a pace of 5.30 million and then expand 3 percent to around 5.45 million in 2016. The national median existing-home price is expected to rise to around 6 percent this year before slightly moderating to around 5 percent in 2016.
Although Yun anticipates further expansion in existing-sales next year, rising mortgage rates and supply constraints are two likely roadblocks that have the potential to slow the pace of sales from being even more robust.
“Rents and home prices are expected to exceed income growth into next year because of the insufficient creation of new home construction and the detrimental impact its inadequacy continues to have on housing costs in several markets,” said Yun. “The real solution to preserving affordability is a substantial ramp-up in housing starts and more homeowners listing their home for sale.”
Yun forecasts single-family housing starts to close out around 1.1 million this year and reach 1.3 million in 2016, which is still below the 1.5 million he says is needed each year to keep up with current demand. New-home sales are likely to total 505,000 this year, and increase to 590,000 next year.
deRitis, who also expects ongoing affordability pressures in some areas as builders slowly respond to current housing shortages, said there’s still an above-average share of young adults living with their parents. He predicted a burst of activity in new construction and home sales coming to fruition in upcoming years, backed by a labor market at full employment, and pent-up demand from delayed household formation and rising rents will encourage more renters to consider buying.
A portion of Yun’s presentation focused on the difficulty facing first-time buyers, whose participation in the market was reported by NAR earlier this month1 and fell to its lowest share in nearly 30 years. Surprised by the under performing percent share, he highlighted a few of the reasons behind their hardships, including a meager amount of affordable inventory, competition from vacation buyers and investors buying similarly priced homes and repaying student loan debt.
“Even among recently successful first-time buyers, 41 percent have student debt and the typical amount is $25,000. Repaying this debt amidst flat wage growth and sharp rent increases only makes it more difficult to come up with the cash needed for a down payment,” said Yun. “Their emergence back into the market will be a gradual one, but our data does show that young adults view homeownership as a good financial investment and part of their personal American dream.”
Yun anticipates the homeownership rate declining slightly further as the number of new renter households exceeds the share of new homebuyers – as it has at least since 2008. He said the pendulum will likely swing towards a balance of more new homeowners as early as 2017.
“Millennials outnumber baby boomers by almost 10 percent, and they’re collectively just entering their homebuying years with marriage and children on the horizon,” added Corr. “The good news is that most surveys are finding that millennials still want to engage directly with mortgage loan professionals and Realtors® at key times in the buying process. Going forward, both will need to adjust accordingly by further adopting digital processes that make the buying experience easy and accessible for this group of engaged buyers.”
As has been the case every year since the downturn, Yun remarked that uneven quarterly economic growth will likely keep Gross Domestic Product around 2 percent to close out this year, before some acceleration next year, with GDP coming in closer to 3 percent (2.7 percent).
On the topic of borrowing rates, Yun foresees the U.S. to start slowly entering a rising interest rate environment in coming months, with the Federal Reserve increasing short-term rates in December, and then again in March. He expects mortgage rates gradually moving upward towards 4.5 percent by the end of 2016.
“Another year of stronger housing demand and sales will be driven by increasing consumer confidence and solid job growth – especially in the states in the West and South that are leading the rest of the pack and will continue to see further job creation,” said Yun. “The one variable to even higher sales will be if supply can keep up enough to keep a lid on prices, especially with mortgage rates on the rise.”
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
1According to NAR’s 2015 Profile of Home Buyers and Sellers, first-time buyer participation fell to 32 percent – the second-lowest share since the survey’s inception (1981) and the lowest since 1987 (30 percent).