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Strong Economic Growth To Propel US Housing Market in 2015

Low Rates, Job Growth will Likely Support Increases in Household Formations, Home Sales and Home Prices

Frank Nothaft    |    Housing Trends

The U.S. economy is poised to grow by close to 3 percent in 2015, generating a 3- to 3.5-million-person gain in employment. This job growth, coupled with very low mortgage interest rates and some easing in credit access, is expected to propel both owner-occupant and rental housing activity this year. This heightened level of housing demand should translate to the best home sales market in eight years, a projected rise of about 5-6 percent in the national CoreLogic Home Price Index (HPI) and mortgage originations that will likely rise in 2015 compared to last year.

Economic growth near 3 percent

U.S. economic growth will be buoyed by three forces in 2015. One is the halving of energy prices since last summer, with prices unlikely to jump back up this year. This price drop has the similar beneficial effect on aggregate economic performance that a tax cut would have: Both consumers and business owners have more cash left each month to spend on other goods or invest in new equipment and financial assets. Lower energy prices could boost growth by as much as 0.5 percent, even though regions of the U.S. with jobs tied to energy production will face a slowdown.

A second force at work is the rise in consumer and business manager confidence in the economic recovery. This rise has been pronounced over the past year, coinciding with the pickup in economic growth (better than 4 percent annualized growth over the last three quarters of 2014) and the drop in energy costs. The Conference Board Consumer Confidence Index and the National Federation of Independent Business’ Small Business Optimism Index have both risen to the highest levels since before the Great Recession. Consumers who feel more financially secure are more likely to form new households and more likely to transition from rental to ownership; and businesses that are more optimistic that demand will be there for their products are more likely to hire staff.

The third factor at work is a significant improvement in the budget outlook for state and local governments. With tax receipts stronger than expected, state and local governments will likely spend more, providing further stimulus to aggregate demand. With these three forces working in concert, 2015 economic growth could hit 3 percent, making this year only the second calendar year over the past decade with growth of 3 percent or better.

Mortgage rates low (but not forever)

Weakness in global economic growth and uncertainty wrought by political tension in parts of the world have encouraged capital inflow to U.S. markets, helping to push long-term interest rates lower. Rates on 30-year fixed-rate mortgages for single-family homes drifted down to 3.6 percent in early February 2015, the lowest in nearly two years and only 0.3 percentage points above the all-time low. Likewise, 10-year U.S. Treasury yields, a benchmark rate for pricing commercial mortgages, eased to below 2 percent for a few weeks at the start of 2015 before turning up in early February.

In addition to low interest rates, several steps toward easier credit access were announced near the beginning of this year. First, both Fannie Mae and Freddie Mac announced a resumption of their purchase programs for 3-percent-down-payment conventional mortgages in December 2014. Then in January 2015, the Federal Housing Administration cut its annual insurance premium by 0.5 percentage points, from 1.35 to 0.85 percentage points per year. Low rates coupled with these programmatic changes will support home sales, especially among first-time buyers. However, these low rates will not be around for long. If economic growth does translate into strong job creation, then the Federal Reserve will likely set a higher federal funds target (currently set at 0.0 to 0.25 percent) by year end, with longer-term interest rates also drifting higher. Rates for 30-year fixed-rate loans are likely to rise above 4 percent, perhaps up to 4.25 percent by year’s end.

Home sales, prices up

With job creation supporting family income growth, and low mortgage rates and easing credit availability supporting financing, home sales are forecast to rise by about 5 percent in 2015, placing sales at their highest level since 2007. Further, the composition of sales will continue to evolve in 2015: This year will experience larger gains in newly built home sales, and existing home sales will reflect more owners who are not under financial stress and buyers who use mortgage financing. MarketTrends data from CoreLogic confirm these trends over the past few years, with new home sales up over each of the last three years, “distressed sales” of existing homes down, and the all-cash share of purchases down (Figure 1).

With for-sale inventories and rental vacancy rates at their lowest in at least 15 years, the strengthening of housing demand will support additional house price gains. The CoreLogic HPI rose 4.8 percent nationally during 2014, and the latest projection is for an additional 6 percent gain in 2015 (Figure 2). While some local markets have achieved new nominal highs based on the HPI, most markets remain below their pre-Great Recession peaks, especially after adjusting for inflation. The CoreLogic HPI for the U.S. at the end of 2014 remained 14 percent below its 2006 peak and even further below after adjusting for inflation.

U.S. Home Price Appreciation

U.S. Home Price Appreciation

Mortgage originations effectively flat

With home sales expected to increase slightly and more buyers financing with mortgages, the dollar volume of originations for home purchase could be up approximately 5-10 percent, including the benefit of price appreciation in 2015. This moderate gain should offset a drop in refinance in 2015 compared with last year. While low rates at the start of this year have fueled a flurry of refinance activity, higher rates later in 2015 will choke off refinance incentives and lead to fewer refinances than during 2014.

Mortgage originations on rental apartment buildings are also expected to be up slightly in 2015. Last year, developers began construction of multifamily rental dwellings at the fastest pace in 25 years, and these projects will require permanent mortgage financing in 2015 or 2016 on the newly existing properties.

In summary, stronger U.S. economic growth will likely support a pickup in household formations, home sales and home prices in 2015. And the projected rise in home values will lift another one million underwater homeowners back into positive equity. While this is good news overall, home sales and new construction will still remain well below their 2005 peak, and prices will remain below their pre-Great Recession peak in most markets.

[1] CoreLogic Home Price Index, including distressed sales, release dated March 3, 2015: http://www.corelogic.com/about-us/researchtrends/home-price-index-report.aspx

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The views, opinions, forecasts and estimates herein are those of the CoreLogic Office of the Chief Economist, are subject to change without notice and do not necessarily reflect the position of CoreLogic or its management. The Office of the Chief Economist makes every effort to provide accurate and reliable information, however, it does not guarantee accuracy, completeness, timeliness or suitability for any particular purpose.

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