Randy Quinn Your Local Real Estate Expert

2016 To Be The Best Year In A Decade For Housing

This year is shaping up to be the best year for housing in a decade.  Home sales, construction housing starts and house prices are set to reach decade-level highs. Here are several reasons why we think this will happen.

Low Mortgage Rates

At the end of 2015, interest rates on 30-year fixed rate mortgages averaged over 4 percent, but declined at the start of 2016 and have remained below 4 percent so far this year. Low mortgage interest rates help support homebuyer affordability in the face of rising house prices and stagnant income.

If interest rates rise rapidly, like they did in the spring of 2013, housing market activity is likely to cool significantly.  Our forecast is for mortgage interest rates to gradually rise, remaining below 4 percent for the first half of 2016, before inching higher and closing the year around 4.4 percent. On balance, the downside risks to this forecast are greater than the upside—there’s a substantial likelihood that rates could remain below 4 percent throughout 2016. The path of rates depends on global economic conditions.

Many countries have negative interest rates.  In Japan the 10-year government bond reached a record low of negative 0.1 percent in March.  Across Europe many countries’ sovereign bond yields also have negative interest rates, some on maturities out to 10 years. Exhibit 1 compares sovereign bond yields for 2-year and 10-year maturities across several advanced economies. While we think there’s little chance the U.S. will have negative rates any time soon, negative rates abroad keep the lid on long-term rates in the U.S.

We think the outlook for global growth will improve—or at least stabilize—throughout the balance of this year and the downward pressure on U.S. rates will abate.  More good news on the domestic U.S. economy, and a return to tightening by the Federal Reserve, will push rates higher later this year. The Fed is likely to only raise rates twice this year, which will slow the pace of interest rate increases.

Resilient Labor Market

The U.S. labor market has been remarkably resilient, producing an average of 205,000 net job gains per month since 2011. The steady flow of jobs has helped to bring the unemployment rate down below 5 percent. On the downside, labor force participation has fallen substantially with no sign of recovery and wage growth remains anemic.

Recent analysis from Goldman Sachs suggests that the labor force participation rate is unlikely to increase much from today’s level. According to their analysis, which accounted for demographic and other socioeconomic factors, only about 0.1 to 0.2 percentage points of the more than 3 percentage point decline in the labor force participation rate since 2007 is due to cyclical factors and can be expected to reverse itself. The rest of the decline is driven by long-term factors like the aging of the population. Under this analysis, the prospects for increased labor force participation are dim.

If the labor force participation rate doesn’t increase and job gains maintain their recent pace, then pressures are going to build and wages will rise. So far wage growth has been anemic, barely keeping pace with inflation. But if you look closely at the latest data on average hourly earnings you might convince yourself that we’re at the nascent stages of a gradual increase in wages.

Wage growth ultimately will be a key factor for housing markets. If wages and incomes do not start rising, then rising interest rates, home prices and rents will squeeze households and ultimately slow housing markets. Read the whole article at Freddie Mac.

Source Freddie Mac

Posted on April 1, 2016 at 5:58 pm by Randy Quinn

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