Yesterday we discussed the overarching market trends according to CoreLogic’s Chief Economist Frank Northaft who presented his market overview in Manhattan this week. It was a very thorough analysis that pointed to broadly good news for the housing market between now and 2018
Unemployment at 5% and declining, core inflation at 1.7%, accommodating monetary policy, consumer confidence at 96, 2.5m new jobs being created each year, 1.2m new households being formed each year and interest rates at a very cheap 4-5% are creating a goldilocks scenario for housing.
Looking more broadly, we also have some significant tailwinds for the market
- New Households: Millennials are leaving the family home in volume. Today, there are more 23-25 year-olds in America than 58 year olds. They are the "new" baby-boomers! Initially they will drive the rental and apartment market as they establish their first homes but soon they will transition to SFH's as renters or buyers….if they can qualify for a mortgage.
- Supply Constraints: We have 1.2 new households formed each year. 120 million households is predicted to become 132 million by 2026. We are not creating nearly enough homes to meet demand.
Breaking this down a little:
- Sales Turnover (home sales as a % of total housing stock) is running at 2/3 of the 2003 -2006 rate. In an average year 7% of total US housing stock sold. In 2015 it was just 4%. Whether through negative equity, reluctance to give up recently secured super-low refinance rates or some other reason - people are staying put for longer.
- New home starts have doubled to almost 1 million per year but that’s still too low by 200,000 (excluding tear-downs which adds a further 350,000 and second homes which add another 100,000). We have a significant supply constraint that’s tough to fix without zoning changes which will take time.
We talked about the housing market yesterday, but what does this mean for the rental market. Corelogic expects significant increase in demand for SFH driven by two factors:
- The Foreclosure crisis hangover: By 2014, the SFH rental stock had grown by 45% to 13 million homes. Investors large and small had bought SFH’s and put them on the rental market. We have seen few exits as most investors think both rents and home prices will continue to rise. So, no new supply is coming to market. In Phoenix and Las Vegas, SFH prices have doubled and rents have increase too…though at a slower pace. The Corelogic Repeat Rent Index (those renewing leases) is running at 5% nationally and anticipates a further 4-5% growth in 2015.
- Lack of available credit: Credit availability continues to be extremely tight. New mortgage originations are running at 2/3 the level of 2001 (being the last “normal” period in recent history). Originators continue to be very careful in underwriting new loans as the GSE’s are hyper focused on their conformance standards and the banks are still reeling from settlements made under the False Claim Act (excluding Quicken, who continue to fight). Fear of penalties under the new rules is constraining new mortgage origination.
So what can we conclude:
It seems like its a pretty good time to be a buy and hold investor. Rents are on the rise, real estate prices are on the rise. Interest rates are low and the economy is doing ok.
- Goldilocks conditions for the economy: low unemployment, low inflation, cheap oil and accommodating monetary policy.
- Supply constraints and low interest rates will drive housing prices for the next 2-3 years. Expect 2016 -18 Corelogic House Price Index at +5%.
- Supply constraints and new household formations will drive rental prices for the next 2-3 years. Expect Corelogic lease renewal Index at +5% for SFH's.
You just have to wonder....is it all too good to be true?
Tomorrow I’ll talk about what this all means for the Mortgage Market
