Two factors appear poised to positively affect
the ability of households to purchase a home according to Fannie Mae's economists. In their initial 2016 Economic Developments
commentary they see further labor market tightening and subsequent increases in
compensation and job security. This, coupled
with indications that lenders expect to continue to ease lending standards and
expand mortgage access should help the housing recovery continue to expand.
Despite these positives however the economists
see opposing factors pointing to constrained housing affordability, especially
for first time homebuyers. These include
continued strong home price appreciation outpacing income growth as well as
rising mortgage interest rates.
In the past homebuyers have had some
measures available to them, such as certain types of adjustable rate mortgages,
to mitigate the impact of rising prices and rates but these are no longer
widely available. Rising rents will also
continue to affect affordability as they hamper renters' ability to save for a
downpayment. They project the home sales market will continue to recover along with
the broader economy in 2016 but that these affordability challenges will serve
to moderate the pace.
They do see housing starts increasing this
year compared to last because of lessening supply constraints and along with
government spending and strong consumer spending, residential investment will
help to drive economic growth. Overall
they expect growth to accelerate slightly to 2.2 percent from an expected 2.0
percent in 2015.
Home building activity already showed some
life in November with a surge in both single-family and multi-family housing
starts and an increase in construction spending in the single-family sector. Existing
homes sales dropped by double digits in November, falling to the lowest level
since April 2014 but the report says implementation of the new TRID disclosure
rule probably delayed some closings and may result in a higher volume of sales
when December numbers come in next week.
New home sales increased in November but that
report also downgraded earlier months' estimates. That put the three-month moving average well
below the recent peak of earlier this year. The poor performance of November
residential construction spending, combined with weak broker commissions
implied by home sales, suggests much lower residential investment growth
than predicted in Decembers forecast.
indicators of home sales were mixed: The pending
home sales index fell in November for the third time over the last four months,
while purchase mortgage applications rebounded in November and rose further in December.
The increase in fed funds target rate at
the December Federal Open Market Committee (FOMC) has so far had a minimal impact
on mortgage rates.
The economists say that the FOMC's
dovish statement and minutes confirmed their expectations of a gradual pace of monetary
policy normalization. They expect three fed funds rate hikes in 2016, one more
than the fed funds futures market implies, but one less than the number
indicated by the median projection of the FOMC members. Based on the strong December jobs report,
muted inflationary pressures and a strong dollar Fannie Mae is looking for
another hike in March and with current Fed guidance that the Fed will continue
to reinvest its securities portfolio for at least another year.
The end results will be an increase in the 30-year
fixed mortgage rate from 3.90 percent in the fourth quarter of 2015
to just 4.15 percent in the final quarter of 2016. Although they expect a
gradual rise, a rate spike remains one of the downside risks for the housing
market this year.
Home price appreciation remains strong.
For example, the Case-Shiller national house price index rose 5.2 percent year
over year in October and 6.3 percent in November each in sequence the largest
increases since July 2014. In addition to the overall indices, CoreLogic provides
trends of four individual home-price tiers calculated relative to the median
national home price. The low-price tier has appreciated most rapidly in recent
months, increasing 8.2 percent year over year in November. Of the four
segments, this low-price tier is the only one with prices surpassing their pre-bubble peak. Most potential
first-time homebuyers tend to
focus on this segment of the market,
where price gains continue to be robust
and inventory is extremely lean so will likely encounter more
difficulty in finding a home they can afford even with only gradual increases
in mortgage rates.
Even with only gradual interest rate changes
Fannie Mae's economists say they believe the home sales market "will face a
challenge of deteriorating housing affordability, driven by continued strong
home price appreciation that outpaces household income growth, especially for
potential first-time homebuyers." Relatively
tight lending standards will also contribute to moderate growth in home sales
this year to about 4.0 percent compared to 6.0 percent in the year just ended. Multifamily housing starts have been very
robust throughout the expansion, so only a small gain is expected this year given
the already elevated levels.
The most upbeat projection in the report
is that single family starts could rise about 17 percent this year compared to
9.0 percent in 2015, a number that came off of depressed levels. The caveat is that the prediction hinges on easing
supply shortages (e.g., skilled labor, available lots) amid continued rising
household formation. Nonetheless,
inventory should still remain
historically lean, leading to another year of solid price growth nationally
although there will be significant variations across regions and especially in