We predict housing in 2016 continuing
to grow the economy. This is mainly
because new-home construction should surpass 1 million units again
this year, and it is new-home construction (and sales), rather than existing-home sales,
that adds to economic growth.
For instance, we see in the December
unemployment report that 45,000 new construction jobs were created plus 73,000 jobs
in Professional and Business Services, which include attorneys, accountants,
insurance agents, architects and designers that work in the real estate
industry.
Much will
depend on interest rates this year, of course, but the conforming 30-year fixed
rate has barely budged from its record low of 3.50 percent for a one point
origination fee. A 3.375 percent fixed rate
is even available in California if a borrower wants to buy down the rate
further.
The best
indicator of future sales is the NAR’s Pending Sales Index, which is based on
signed contracts, and consistently in 2015 predicted sales in the range of 5
million to 5.5 million, similar to the level in the early 2000s.
One reason
we believe housing has more room to grow is that new-home construction hasn’t
fully recovered from the Great Recession, and is the reason for lower sales of
new homes. Sales have generally picked up through the year, but are running at
half the rate of 2000 and 2001, when nearly 1 million newly built homes were
sold. New-home sales rose in November to an annual rate of 490,000, which is
far below the peak of around 1.2 million sales in 2005.
More
new-home sales will depend on increased household formation, which economists
are predicting will return to 1.2 million new households per year. Why? The
Millennial generation is beginning to buy as they marry and begin to raise
children.
Some 1,071,000 construction jobs
have been added since 2011, according to Calculated
Risk. And delinquency rates have
returned to pre-recession levels—in fact are the lowest in history, according
to Black Knight’s Mortgage
Monitor Report, reports Calculated Risk’s Bill McBride. This is perhaps the most important statistic
for the housing recovery, since it means more borrowers are available to buy
homes. Black Knight now calculates that approximately 5.2 million borrowers
could likely both qualify for and benefit from refinancing at today’s interest
rates.
But if
mortgage rates rise by even 50 basis points (i.e., 0.5 percent), some 2.1
million borrowers will no longer be eligible for refinancing, or buying another
home, says Black Knight.
So does the
Fed really want to slow down or even kill the housing market, if it continues
to raise their interest rates? That is the real question. This might not affect mortgage rates all that
much, however, as mortgage rates depend on longer term interest rates and the
bond market, which follows inflation.
But we still have almost no
inflation. Higher food prices are
balanced by lower gas and commodity prices in general, and which will continue
to fall as the oil glut continues this year.
We believe that interest rates will therefore remain low throughout
2016.
Why? There is very little growth in the rest of
the world, and developing countries like Russia and Brazil are already in
recessions, while China’s economy stagnates. That means foreign investors will
still flock to the one safe haven in times of uncertainty—U.S. Treasury Bonds—thus
keeping our interest rates low.
Harlan Green © 2016
Follow Harlan
Green on Twitter: https://twitter.com/HarlanGreen
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