As we approach the start of 2016, the consensus view among economists is that economic growth will continue and the U.S. will enter an eighth consecutive year of expansion in the second half of next year. Most forecasts place growth at between 2 and 3 percent during 2016, creating enough jobs to exert downward pressure on the national unemployment rate. If such macroeconomic conditions do prevail in 2016, we will likely see the following five features in next year’s housing market (see Exhibit 1).
First, interest rates will gradually move higher in 2016. The Federal Reserve is expected to raise short-term interest rates, and the consensus view among Fed policy makers is that the federal funds target should be raised around 1 percentage point between now and the end of 2016. Higher short-term rates will mean that homeowners who have adjustable-rate mortgages or home-equity lines will likely see a rise in their rate. Fixed-rate mortgage rates will likely also rise, perhaps up one-half of a percentage point between now and the end of 2016, reaching 4.5 percent for 30-year loans. Even after this rise, mortgage rates will remain historically low, more than a full percentage below the average rate during the Great Recession (see Exhibit 2).
Second, household formations should add significantly to housing demand. Improving labor markets propelled an acceleration in the formation of new households last year, and we should see more than 1 and a quarter million net households formed in 2016, and most new households will want rental homes.
This leads to the third feature of the 2016 housing market, continued strong demand for rental homes, both apartments and houses. Rental vacancy rates are at or near their lowest levels in 30 years, and rents are rising quicker than inflation. These market conditions will likely continue in 2016, as newly built apartments are absorbed by demand from new, young households. Look for rental vacancy rates to remain relatively low and rent growth to outpace inflation in 2016.
Fourth, the owner-occupied housing market will likely see an increase in home sales and house prices. The improved macroeconomy has brightened the financial outlook for many families and enhanced their sense of financial security. Overall purchase demand may increase home sales in 2016 to the best year since 2007. Appreciation in national home price indexes will likely continue at a faster pace than inflation, but grow more moderately than last year. For example, the CoreLogic Home Price Index was up about 6 percent over the last 12 months, and we anticipate a rise of 4 to 5 percent during 2016.
Fifth, overall single-family mortgage originations will fall about 10 percent in 2016 compared with this year, while multifamily originations will likely rise. The decline in single-family will occur even though we expect that originations of home purchase loans will likely rise about 10 to 12 percent in volume next year, and home equity lending will rise as well. However, growth in these two segments will be swamped by a more than one-third drop in refinance, reflecting the higher mortgage rates and dwindling pool of borrowers with a strong financial incentive to refinance (see Exhibit 3). The gain in multifamily lending reflects the higher property values and completion of new buildings that add to permanent mortgage usage.
Best wishes for a healthy and successful 2016!
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