Homebuilder Sentiment Rises in June

As Americans are starting to feel more optimistic about purchasing homes, homebuilders are feeling hopeful about their sales. This is a welcome relief after a weak start to the spring home-selling season. During that time both parties were concerned about their prospects in the housing market. A recent article from The Seattle Times discusses the causes and importance of this positive change in sentiment among both groups.

How can we determine a rise in sentiment among home buyers and homebuilders? People have always understood the benefits of home ownership, so while the desire and demand have been constant, many factors deterred potential homeowners from investing in real estate. Lately we’ve seen that steady job gains and low mortgage rates are encouraging those people to buy new homes with less risk. That drives home construction and helps support the economy. This is where homebuilders come in (feeling optimistic).

Though new homes represent a small fraction of the housing market, they have an outsized impact on the economy. According to data from the National Association of Home Builders (NAHB), each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue. While we could just assume that new, steady jobs boost morale, the NAHB/Wells Fargo have an index that actually quantifies builder sentiment. Readings above 50 indicate more builders view sales conditions as good rather than poor. As of last Thursday, the reading was at 60, which is the highest it’s been since January.

Although the housing market has yet to recover from the consequences of the downturn a decade ago, rising sentiments prove that we are making progress. According to Robert Dietz, the NAHB’s chief economist, the latest builder survey results indicate that the housing market “should continue to move forward in the second half of 2016.” That makes us feel pretty optimistic, too.

Read the full article at The Seattle Times.

Local Market Update – February 2016

Record low inventory has placed the area in an extreme seller’s market. 70 percent of homes sell in the first 30 days. With 30 percent less inventory than a year ago, multiple offers are all but guaranteed. If you’re selling, you can name your terms. For those looking to buy, it’s critical to work with a broker to arrange for financing, and create a strategy for escalation clauses and back-up offers.

Eastside

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The supply of homes on the Eastside has reached a critical point with just one month of available inventory. To put that in perspective, there are currently fewer than 100 single family homes on the market in the City of Bellevue. And 80 percent of those listings are priced above the Eastside median sale price of $697,500. With the median price of a single family home sold in January up 12 percent over a year ago, sellers can count on making excellent gains if they decide to list their home.

King County

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Strong population growth fueled by the area’s healthy job market continues to starve the region’s already limited inventory of homes. Depleted inventory resulted in sales that were down nearly 15 percent compared to last January. Not surprising, since inventory was down more than 31 percent. Limited supply pushed single family home prices up 11 percent over a year ago to $490,970. Those shopping for a relative bargain searched outside the city core. The median home price in Southwest King County was $304,103. The median price in Southeast King County was $350,000.

Seattle

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After hitting all-time highs in the past few months, home prices here reached a new peak. The median sale price of a single family home in Seattle rose to $618,450 in January, a whopping 20 percent increase over a year ago. Inventory is razor thin. The Ballard neighborhood has just 20 homes currently for sale. Sellers are solidly in the driver’s seat, and have the luxury of choosing from multiple offers and being able to drive terms to their advantage, whether it’s closing time, amount of earnest money, or other concessions.

2016 Economic & Housing Forecast

The National Economic Forecast

1. The U.S. will continue to expand with real GDP growth of 2.3% in 2016.

Although a positive number, the forecasted rate of growth suggests that we will be modestly underperforming in 2016.  On a positive note, oil prices are likely to remain well below long-term averages, which puts more money into consumers’ pockets in terms of disposable incomes.  However, I believe that consumers are likely to continue to save rather than spend which will constrain growth.  That said, there is certainly no recession on the horizon – at least not yet – and a strong dollar will act as a bit of an anchor.

2. Employment will continue to expand but the rate of growth will slow. Look for an increase of 1.6% in 2016.

We are rapidly approaching full employment (generally considered to be when the unemployment rate drops below 5 percent).  As such, growth in employment has to be driven more by population growth rather than a return to employment. 2015 saw an average of around 210,000 jobs created per month and I believe that this is likely to slow to an average monthly gain of 190,000 new jobs.

3. The U.S. unemployment rate will continue to drop and end 2016 at 4.8%.

As mentioned above, we are heading toward full employment and, as such, the national unemployment rate cannot trend much lower.  That said, the less acknowledged U-6 rate (which includes those working part-time and those marginally attached to the workforce) will remain elevated at around 8%, signifying that there is still some slack in the economy and room for the rate to drop a little further.

4. Inflation will remain in check with the Consumer Price Index at 1.9%.

The Federal Reserve has begun the long-awaited tightening of monetary policy and we will likely see the Fed Funds Rate continue to move higher over the next two years. Inflation has yet to respond to the low unemployment rate, but it will.

The core rate of inflation should remain in check and the overall rate could stay below long-term averages as a function of stubbornly low energy costs. Should we see a shift in OPEC’s position relative to oil supply, the overall rate of inflation could rise more rapidly.  Oil prices, therefore, will remain in focus during 2016.

The National Housing Market Forecast

5. Mortgage rates will rise, but we will still end 2016 with the average 30-year fixed rate below 5%.

I am taking the Fed at its word when it says that monetary tightening in 2016 will be gradual and heavily data dependent. Accordingly, I expect only a modest uptick in long-term rates in 2016. Furthermore, as long as the Federal Reserve continues to reinvest the dividends that it is receiving from their bond holdings – which is highly likely – the yield on the key 10-year treasury will remain low and hold mortgage rates in check. This is only likely to change after the general election, therefore suggesting that rates will remain very attractive relative to their long-term averages.

6. Credit Quality – which had been remarkably stringent – will relax a little.

Access to credit, specifically mortgage instruments, has not been easy for many would-be homebuyers but that is set to change. I believe that we will see some improvement, specifically for borrowers with “near-prime” credit. This will be of some assistance to first-time buyers; however, credit quality will still be higher than it needs to be.

7. Existing home sales will rise modestly to an annual rate of 5.53 million units with existing home prices up by 4.7%.

I anticipate that we will see some improvement in overall transactional velocities in 2016, but unfortunately, demand will still exceed supply. Prices will continue to rise, but at a more constrained pace than seen over the past few years. This will be a function of modestly rising interest rates as well as slightly improving levels of inventory. I anticipate that we will see more listings come online as more households return to positions of positive equity in their homes.

8. New home sales will jump and be one of the biggest stories for 2016.  Look for a 23% increase in sales and prices rising by 3.4%.

I believe that builders will start to build to the entry-level buyer, filling a huge void.  Additionally, I see the total number of new home starts increase quite dramatically in 2016 as banks start to ease lending and builders start to believe that the downward trend in homeownership has come to an end.  This will help to absorb some of the pent-up demand currently in the market.

9. Foreclosures will continue to trend down to “pre-bubble” averages.

Any story regarding foreclosures will be a non-story as the rate will continue to trend down toward historic averages. However, we will see the occasional uptick as banks work their way through their existing inventory of foreclosed homes. Move along.  There’s nothing to see here.

10. The Millennials will start to enter the market.

There are several substantial reasons to expect an increase in Millennial buyers. Firstly, early Millennials are getting older and starting to settle down, and even with modestly higher mortgage rates, rents are likely to continue to trend upward, and this will pull many into homeownership.

Secondly, more favorable mortgage insurance premiums, additional supply from downsizing boomers, and growing confidence in the housing market will lead to palpable growth in demand from this important – and substantial – demographic.

To conclude, it appears to me that 2016 will be a year of few surprises – at least until the general election! Because it is an election year, I do not expect to see any significant governmental moves that would have major impacts on the U.S. economy or the housing market.

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Matthew Gardner is the Chief Economist for Windermere Real Estate, specializing in residential market analysis, commercial/industrial market analysis, financial analysis, and land use and regional economics. He is the former Principal of Gardner Economics, and has over 25 years of professional experience both in the U.S. and U.K.