After years of sluggish activity in the housing market, many of the wounds from the Great Recession are healing and the scars are barely visible. Millennials, many of whom were slow to launch after years of job market contraction followed by a slow recovery, are moving out of their parents’ basements and buying their own homes. Average housing prices are rising and inventory levels remain tight. Big picture? The macroeconomic environment may be positive for the housing market in 2017, some economists say.
For many years, renting had been more appealing, especially for Millennials, who saw their parents’ homes drop in value for the first time in decades. Many also saw a home purchase as an impediment to labor mobility, but all that may be changing. "Confidence in the housing market is being restored. Year-after-year, potential buyers saw home prices fall. The deflationary psychology that home prices will go down has been broken," says Ryan Sweet, director of real time economics at Moody's Analytics.
Three Factors That May Support Housing
The most recent existing home sales data (for November 2016) came in at a seasonally adjusted 5.61 million. That marked the highest sales pace since February 2007, and was 15.4% higher than the figure from a year ago, according to the National Association of Realtors.
Looking ahead, Sweet forecasts home sales north of six million in 2017. "A lot of the housing recovery is still ahead of us," says Sweet. He points to three factors that will support housing in 2017.
- A tightening labor market
- Accelerating wage growth
- Pent-up demand for new household formation
There is no better stimulus for the housing market than jobs, says JJ Kinahan, chief market strategist at TD Ameritrade. While the December U.S. jobs data may have disappointed slightly in terms of new jobs created, the key takeaway is that wages are rising. "Higher wage growth is one of the trends we have seen over the past two years, albeit at a slower pace," Kinahan says. Average hourly earnings climbed 2.9% on a year-over-year basis in December. The overall unemployment rate stood at 4.7% and some economists say the data represents a labor market running near full employment.
"Housing is an important part of the economy," says Sweet. Housing contributes to the labor market in a variety of ways, from new construction jobs such as roofers, electricians, plumbers and drywallers, to indirect jobs in the economy from big-box home improvement retailers to services including lawn care, Sweet explains.
Also, many economists say rising home values contribute to the so-called “wealth effect,” whereby increases in asset prices give consumers added confidence to spend money on such things as big-ticket items and vacations.
Risks to Housing
Mortgage rates have risen noticeably in the last couple of months. Prior to the November 2016 election, a 30-year fixed rate mortgage stood at 3.77% but has since jumped to 4.39% as of Dec. 30, Sweet says. Looking ahead, he forecasts 30-year mortgage rates to end the year around 4.2%, but concedes that higher rates could be a "wild card" for the housing market in 2017.
Affordability could be another risk to the housing market. "Home price comparisons depend on the region, but by some measures we are very close to— if not at—pre-recession peaks. House prices will continue to appreciate in 2017," Sweet says, pointing to tight supplies as a chief driver.
"Inventories of existing homes are very lean. Anything turnkey-ready is selling very very quickly. House prices may have to rise a little more," Sweet says. That, combined with rising mortgage rates, could pose affordability problems for homebuyers. Unsold inventories are currently at about a 4-month supply. That compares to a 6-month supply, which is typically seen as a balanced market between buyers and sellers.
Invest In What You Know
If you are an investor who believes the housing recovery will pick up even more steam in 2017, you may wish to expand your investment horizons. "As investors we tend to get too stuck on the house itself,”Kinahan says. “If you are bullish on housing, look around your house. If you are using a brand and are happy with it, do some research, and that may be your trading idea," he says.
"It's not just the homebuilders like Pulte (PHM) or D.R. Horton (DHI) that could benefit; look at the Home Depots (HD) and Lowe’s (LOW) of the world, and also companies that supply things that go into a new home like Whirlpool (WHR) and USG Corp. (USG)," Kinahan says.
You can monitor the health of the housing market through a variety of economic reports including housing permits and starts. "These are leading indicators," Kinahan says. Figure 1 below shows the pace of housing starts from before the Great Recession in 2007, through 2016.