The Continuing Return To Normalcy For The Housing Market In 2016
As the U.S. economy continued to recover from the Great Recession last year, the housing market also improved markedly. The third quarter of 2015 was reportedly the housing market’s best quarter in nearly a decade according to the National Association of Realtors® (“NAR”) Chief Economist Lawrence Yun, as reported in a REALTOR® Mag article dated November 13, 2015. Yun also reported a 7% growth in existing home sales and an almost 6% growth in home prices in 2015. In addition, according to the Case-Schiller Home Price Index, national home sales prices had a year-over-year gain of 5.2% in October 2015, compared to 4.5% reported in October 2014. With respect to home construction, the U.S. Census Bureau and the Department of Housing and Urban Development jointly announced that housing starts rose to a seasonally adjusted annual rate of 1,173,000 in November 2015, which is 16.5% above the November 2014 rate of 1,007,000. According to the National Association of Home Builders’ Housing Market Index, home-builder confidence is reportedly also at a 10-year high, as reported by a Marketwatch.com article dated October 29, 2015.
While the current economic uncertainty in China, volatility in the stock market, collapsing oil prices and other global factors have led some to predict an overall economic slowdown (or even another recession) for the U.S. in 2016, most economists continue to remain optimistic that the U.S. housing market will continue to improve in 2016, but at a much slower rate compared to the phase of rapid recovery immediately after the Great Recession.
According to Redfin’s forecast for 2016, as reported by a Housingwire.com article dated December 14, 2015, “Most economists agree that housing prices and sales will continue to grow in 2016, just at a slower pace. Call it a slowdown, but not bad news…. All things considered, we see a fairly uneventful housing market next year.” Yun stated in NAR’s 2016 video forecast that in 2016, “the housing market may only squeak out 1 to 3 percent growth in home sales because of slower pace of economic expansion and rising mortgage rates.” Yun also predicted growth in home price between 4 to 5% in 2016. Realtor.com’s 2016 housing forecast also predicted existing home sales and prices both slowing to 3% year-over-year growth, as reported in a PRNewswire.com article dated December 2, 2015, while Zillow’s 2016 Forecast projects home value growth at about 3.5% in 2016.
Although the growth in the housing market is expected to slow down in 2016, experts generally agree, as was the case in 2015, that the slower growth is a move towards a more stable and sustainable recovery. The Urban Land Institute/Price Waterhouse Coopers’ Emerging Trends in Real Estate® 2016 opined that “[t]he elements of a housing development trend towards greater normalcy are falling into place, after the catastrophic bursting of the mortgage-induced bubble of a decade ago.”
As was the case in 2015, many experts continue to watch millennials closely in analyzing the housing market’s continued recovery in 2016. In 2015, over one out of three homes was bought by millennials (those buyers between the ages of 25 and 34), most of whom were first-time home buyers, as reported by Realtor.com’s Chief Economist Jonathan Smoke. The NAR also reported that millennials made up the largest population of buyers for the second consecutive year in 2015. This trend will likely continue into 2016 as millennials are getting older and their finances improve. In addition, according to Smoke, financially recovering members of generation X (those between the ages of 35 and 50) looking to finally upgrade their existing homes and older boomers thinking of retiring and downsizing their homes may also significantly increase market activity since these generational groups will act as both buyers and sellers in 2016. The increased activity in home sales by these older generational groups may also free up inventory for the younger millennials which should contribute to the housing market’s continued recovery.
However, according to Zillow’s 2016 Forecast, lack of affordability will continue to be a major problem for millennials and first-time home buyers in 2016, with many such buyers moving out to the suburbs due to the lack of affordable homes near city centers. “In 2016, we’ll start to see more people in hot coastal markets forced to move farther from the core of the city to find housing,” said Zillow Chief Economist Svenja Gudell. “When they get there, they’ll be looking for amenity-rich suburbs – mini-cities, with walkable cores and an urban feel.” The American Institute of Architect’s Chief Economist Kermit Baker also similarly reported in AIA’s Home Design Trends Survey that “[t]here has been a pronounced shift in driving habits over the last few years, with increasing numbers of people being far more interested in walking and utilizing public transit options. With that is a desire for proximity to employment and commercial activities.” The 2015 National Community and Transportation Preference Survey, released by the NAR, similarly reported that mixed-use, walkable communities are growing in popularity among Americans of all age groups, but particularly with millennials.
Moreover, as rental inventory continues to remain low and demand continues to increase, experts predict that rental rates will soar in 2016, which will make saving for a down payment on a home much harder for millennials and first-time home buyers. According to the U.S. Census Bureau, the national rental vacancy rate was 7.4% for the third quarter of 2015, and the rental vacancy rate for California was only 4.2% for the same period, both historically low rental vacancy rates. Given the high demand for residential rental housing, according to the 2015 Rent.com Rental Market Report, rental rates could rise by an average of 8% through 2016.
Given the lack of affordable inventory, rising rents and the fact that the gains in home prices continue to outpace wage growth, Zillow’s 2016 Forecast further predicts that the median age of first-time home buyers will set a new record in 2016, with buyers in 2015 already about three years older, on average, than they were in the 1980s.
Analysts also predict that 2016 will be a strong year for construction of single-family homes, although the multifamily sector may slow down in 2016. According to Dodge Data & Analytics’ 2016 Construction Outlook, single-family construction is projected to see a 20% increase in starts in 2016, while multifamily construction is expected to see a 7% gain after several years of double-digit increases, as reported in a Construction Dive article dated January 4, 2016. “I expect the homebuilding sector will continue to show improvement. If anything happens on the multifamily side, I think it will probably level off. The upward slope for multifamily won’t be as strong as for single-family,” according to Alex Carrick, CMD’s Chief Economist. However, single-family construction has not yet reached pre-recession levels, with NAHB Chief Economist David Crowe reporting in a NAHB webinar that single-family construction is currently 53% back to what is considered “normal” levels, while multifamily is already higher than “normal” levels.
In addition, after nine years without a rate hike, the Federal Reserve finally raised interest rates at the end of last year, with some experts forecasting up to four additional interest rate hikes of 25 basis points each, for a total of one percentage point by the end of 2016. While interest rate hikes typically result in increases in home prices and a corresponding mortgage market slowdown, most experts believe that mortgage interest rates will continue to remain at record lows through 2016, thus minimizing any real effect on the continued recovery of the housing market. “The benchmark 30-year fixed-rate mortgage will spend the bulk of 2016 in the low 4s and remain well below the 5% mark throughout the year,” says Bankrate’s Chief Financial Analyst Greg McBride, as reported in Bankrate’s Mortgage Rate Forecast for 2016. While Smoke of Realtor.com projected that the 30-year fixed rate could reach close to 4.65% by the end of 2016. Frank Nothaft, Chief Economist at CoreLogic, also agrees. "Even after this rise, mortgage rates will remain historically low, more than a full percentage below the average rate during the Great Recession," Nothaft said in a blog post.
Similar to the national trends, the California Association of Realtors (“CAR”) projected in its 2016 California Housing Market Forecast that 2016 will see continued overall improvement in the housing market in California, but at a much slower rate due to shortage of inventory and continuing high costs. According to this report, existing home sales are expected to rise by 6.3% in 2016 over 2015’s expected total, and California’s median home price is projected to increase 3.2% to $491,300 in 2016, following a projected 6.5% increase in 2015 to $476,300. Although home prices are expected to continue to increase in 2016, CAR’s forecast also pointed out that the projected increase is the slowest rate of price appreciation in five years.
“The foundation for California’s housing market remains strong, with moderating home prices, signs of credit easing, and the state continuing to lead the nation in economic and job growth,” said CAR Vice President and Chief Economist Leslie Appleton-Young. But Appleton-Young went to caution that “the global economic slowdown, financial market volatility, and the anticipation of higher interest rates are some of the challenges that may have an adverse impact on the market’s momentum next year.” CAR President Chris Kutzkey also noted that “in regions where inventory is tight, such as the San Francisco Bay Area, sales growth could be limited by stiff market competition and diminishing housing affordability. On the other hand, demand in less expensive areas such as Solano County, the Central Valley, and Riverside/San Bernardino areas will remain strong thanks to solid job growth in warehousing, transportation, logistics, and manufacturing in these areas.”
The general consensus for the 2016 housing market appears remarkably similar to that of 2015 in that the housing market should continue to improve through 2016, but just at a slower pace. A slowdown is not necessarily a bad thing, but rather an indication that the housing market may be returning to a more “normal”, but sustainable, rate of growth. “This slowdown is not an indication of a problem – it’s just a return to normalcy.” writes Smoke. “We’ve lived through 15 years of truly abnormal trends, and after working off the devastating effects of the housing bust, we’re finally seeing signs of more normal conditions. Distress sales will no longer be playing an outsized role, new construction is returning to more traditional levels, and prices rise at more normal rates consistent with a more balanced market.” And as Zillow noted in its forecast, its projected 3.5% home value growth in 2016 is roughly the historical average.
While a return to normalcy may not be a particularly exciting forecast for 2016, given the volatility in the housing market during the prior years and the current state of affairs in the stock market and globally, an uneventful year may be a welcome change. And considering retail spending and development is closely tied to the recovery of the housing market, this may be good news for the retail sector as well.