Relentless supply constraints and home price growth outpacing wages are testing the patience of homebuyers this year, but existing-home sales are still on track to come in at their highest pace since 2006, according to an economic forecast forum at the 2016 REALTORS® Legislative Meetings & Trade Expo.
Lawrence Yun, chief economist of the National Association of REALTORS®, presented his midyear economic and housing forecast and was joined onstage by U.S. Sen. Elizabeth Warren (D-Mass.). Senator Warren explained with purpose the growing burden repaying student loan debt is having on young adults, the housing market and the overall U.S. economy.
According to Yun, monthly existing-home sales were uneven in the first quarter but still came in at a seasonally adjusted annual rate slightly higher (5.29 million) than last year’s overall annual pace (5.26 million). Demand has mostly remained strong – especially in the top job-producing metro areas – and is being upheld by mortgage rates near three-year lows and the 14 million jobs gained since 2010.
“The housing market continues to expand at a moderate pace in spite of the fact that home prices are rising too fast in some areas because of insufficient supply fueled by the grossly inadequate number of new single-family homes being constructed,” said Yun. “The good news is that pending sales in recent months have remained stable and should support a modest gain in home sales heading into the summer.”
Yun forecasts existing sales to finish 2016 at a pace of around 5.40 million – the best year since 2006 (6.48 million). After accelerating to 6.8 percent in 2015, the national median existing-home price is forecast slightly moderate to between 4 and 5 percent this year.
During her remarks, Senator Warren applauded REALTORS® for their role in helping build America’s middle class through homeownership. Unfortunately, Warren explained, this path to economic security is being threatened by the seven out of 10 college graduates that need to borrow thousands of dollars to attend college and then spend countless years afterwards repaying the debt at high interest rates.
“Student debt is crushing young people, it’s hurting the nation’s economy and delaying the opportunity for many to buy their first home,” said Warren, who cited NAR’s 2015 Profile of Home Buyers and Sellersdata on the percent share of first-time buyers remaining at its lowest point in nearly three decades (32 percent). “Every monthly payment going to reducing their student debt could instead be money going towards saving for a down payment on a house.”
On the topic of first-time buyers, Yun remarked that their ongoing absence is the missing link to a full housing recovery; this is, amazingly, during a time when conditions are ripe for a larger share of them buying homes. Job growth has been strong for multiple years, rents have soared in many areas and mortgage rates are historically low. Unfortunately, a multitude of factors such as increasing home prices amidst flat wage growth, the lack of available starter homes and repaying student loan debt is thwarting many young would-be buyers.
“Spectacularly low mortgage rates mean today’s prospective homebuyers are the luckiest in a generation but the unluckiest in actually becoming homeowners because of the roadblocks hampering their ability to buy,” added Yun.
Warren concluded her remarks by urging Congress to pass the “Bank on Students Emergency Loan Refinancing Act,” which would give a much-needed break to student debt borrowers by giving them a chance to refinance their federal and private student loan debt at the same low rates offered to new borrowers in the federal student loan program.
Yun on inventory shortages, home prices and unspectacular economic growth
Although contract signings nationally have held steady for several consecutive months, Yun said regional differences are beginning to appear in places where home prices have appreciated the fastest – specifically in parts of the South and in the West. Although data from the REALTORS® Confidence Index shows that home buyer traffic is still strong, demand is somewhat weakening from a lack of available inventory and the subsequent affordability pressures it’s putting on a large segment of would-be buyers.
“Homebuilders need to significantly ramp up production so that more existing homeowners can trade-up and list their home for sale,” added Yun. “Otherwise, inventory shortages will continue and demand could soften even more in some areas as a greater number of buyers are unable to find homes at affordable prices.”
Ultimately, Yun foresees housing starts ending up higher than last year (1.1 million), but still below the 1.5 million necessary each year to keep up with current demand. New home sales are likely to total 540,000 this year, which is only a little more than half the rate from the pre-boom years in the early 2000s.
Yun said rents, which rose last year at a seven-year high, will be a big driver of future inflation, along with gas prices, and will ultimately steer the direction of mortgage rates. If rent growth continues at its current pace, inflation will be stronger and push rates higher. Slowing rent growth would have the opposite effect by keeping a lid on inflation and holding rates at a very manageable level. For now, he foresees mortgage rates continuing to hover around 4 percent in coming months before gradually moving upward into next year.
Despite solid job gains in the past few years, Yun stated that economic growth continues to be unimpressive. The rising U.S. dollar against other foreign currencies and the slowing global economy since late last year would likely be causing our economy to teeter on the edge of a recession if it weren’t for the boost from the housing component of Gross Domestic Product. Through the rest of the year, he expects GDP to register at only 1.6 percent and be primarily kept afloat by housing and consumer spending.
Even with underlying challenges, Yun explained that the housing market has come a long way since the depths of the recession. Mortgage delinquency rates – especially for Veteran Affairs mortgages – have subsided to near pre-crisis levels and home prices have rebounded substantially in a majority of metro areas, which in turn has boosted household wealth for many homeowners.
“The economy should still expand enough to continue the current pace of job creation, which will in turn lead to slow, but steady sales gains for the housing market,” concluded Yun.
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