High Builder Confidence Signals More Affordable Housing In 2016

The Mortgage Corner

Builder confidence in the market for newly-built single-family homes held steady at 60 in January from a downwardly revised December reading of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index. Any number above 50 says that a majority of builders are optimistic about future new-home construction and sales.

Builder confidence is as good for predicting new-home construction and sales as is the Pending Home Sales Index for existing sales. And it shows builder confidence is back to pre-recession levels.

“January’s HMI reading is right in line with our forecast of modest growth for housing,” said NAHB Chief Economist David Crowe. “The economic outlook remains promising, as consumers regain confidence and home values increase, which will help the housing market move forward.”

And housing starts fell 2.5 percent last month to an annual rate of 1.15 million, the government said Wednesday. For all of 2015 home builders started work on 1.11 million new houses, the largest number since the Great Recession. Starts climbed nearly 11 percent compared to 2014. Requests for new building permits, meanwhile, slipped to an annual rate of 1.23 million in December. But the increase in permits was also the strongest in 2015 since the Great Recession.


Graph: Marketwatch

Overall, permits rose 12 percent in 2015 to an estimated 1.18 million units. Permits reflect how many new homes that companies plan to build in the near future. Rising demand for new and existing homes has boosted sales of a wide variety of goods used to furnish them. The housing market was one of the strongest performing parts of the economy in 2015.But more new homes being built will hold down prices, which makes homes more affordable, especially for millennial generation buyers just coming into the market.

So what about those rising prices? Calculated Risk reports that FNC’s Residential Price Index shows housing prices rising at 5 percent per year, as are the Case-Shiller and most other housing price indexes. But that is a leveling off from the peak of 10 percent in 2014, when the housing market first shook off the housing bubble.

Prices are rising moderately, as opposed to faster rising pre-recession prices all the way back to 2000, which gives hope that affordability won’t be such a problem.


Graph: Calculated Risk

There is also an optimistic report by Fannie Mae just out. Fannie Mae’s Economic & Strategic Research Group states that it expects further labor market tightening will lead to increased household income and job security amid more relaxed lending standards and easier access to mortgage credit throughout 2016.

But strong home price gains, especially in the lower-end of the market, will continue to outpace household income growth, which, in turn, will negatively affect affordability, Fannie Mae said.

Additionally, Fannie Mae said consumer spending is expected to support economic growth again in 2016, while residential investment and government spending should help drive growth despite some drag from net exports.

Overall, the ESR Group said that it expects the economy to grow 2.2 percent for all of 2016, with China’s deteriorating economic activity, a stronger dollar, geopolitical turmoil, and uncertainty about monetary policy remaining as risks to the outlook.

“We ended 2015 with a positive jobs report, an annual record high for auto sales, and the housing market poised to be the strongest since 2007,” said Fannie Mae Chief Economist Doug Duncan.

“The first Fed funds rate hike since 2006 has had a minimal impact on mortgage interest rates so far, and we believe mortgage rates will edge up only gradually, ending the year around 4.2 percent,” Duncan continued.

We are currently seeing 3.50 percent conforming fixed rates in California, which given nonexistent consumer inflation, makes me believe that Dr. Duncan’s rate forecast is a bit too conservative.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Housing, housing market, Weekly Financial News and tagged , , , , , . Bookmark the permalink.

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