NAR's Economic and Forecast Update (July 1, 2015)

July 8, 2015

The National Association of REALTORS® (NAR) released an Economic and Forecast Update on July 1, 2015. Here are some highlights from that report.

The Economy

GDP growth was slightly negative in the first quarter but will pick up in the second half. All in all, GDP will grow by 2.5 to 3 percent in the second half. That translates into jobs. A total of 2.5 million net new jobs are likely to be created this year.
Consumer spending will open up because of lower gasoline prices. Personal consumption expenditure grew at 2.1 percent rate in the first quarter. Look for 3 percent growth rate in the second half.
Business spending was flat in the first quarter but will surely rise because of large cash holdings and high profits.
Government spending fell by 1 percent. At the federal level, non-defense spending grew by 2 percent, while national defense spending fell by 1 percent. At the state and local level, spending fell by 1 percent.
The part-time jobs remain elevated and wage growth remains sluggish with only 2 percent annual growth. There are signs of tightening labor supply and the bidding up of wages. Wages are to rise by 3 percent by early next year. The total income of the country and the total number of jobs are on the rise.

The Housing Market

Existing-home sales in May hit the highest mark since 2009, when there had been a homebuyer tax credit … remember, buy a home and get $8,000 from Uncle Sam. This tax credit is no longer available but the improving economy is providing the necessary incentive and financial capacity to buy. Meanwhile new home sales hit a seven-year high and housing permits to build new homes hit an eight-year high. Pending contracts to buy existing homes hit a nine-year high.
Buyers are coming back in force. One factor for the recent surge could have been due to the rising mortgage rates. As nearly always happens, the initial phase of rising rates nudges people to make decision now rather than wait later when the rates could be higher still.... Buyers are back. What about sellers? Inventory remains low by historical standards in most markets. In places like Denver, where a very strong job growth is the norm, the inventory condition is unreal – less than one month supply. The principal reason for the inventory shortage is the cumulative impact of homebuilders not being in the market for well over five years.
Building activity for apartments has largely come back to normal. The cumulative shortage is on the ownership side.
Builders will construct more homes. By 1.1 million in 2015 and 1.4 million in 2016. New home sales will follow this trend. This rising trend will steadily relieve housing shortage. In the meantime, there is still a housing shortage. The consequence is a stronger than normal home price growth. Home price gains are beating wage-income growths by at least three or four times in most markets. Few things in the world could be more frustrating and demoralizing than for renters to start a savings program but only to witness home prices and down payment requirements blowing by past them.
Housing affordability is falling. Home prices rising too fast are one reason. The other reason is due to rising mortgage rates. Cash-buys have been coming down so rates will count for more in the future.
The Federal Reserve will be raising short-term rates soon. September is a maybe, but it’s more likely to be in October. The Fed will also signal the continual raising of rates over the next two years. This sentiment has already pushed up mortgage rates. They are bound to rise further, particularly if inflation surprises on the upside.
Mortgage rates at 4.3% to 4.5% by the year end and easily surpassing 5% by the year end of 2016. The rising mortgage rates initially rush buyers to decide but a sustained rise will choke off as to who can qualify for a mortgage. Fortunately, there are few compensating factors to rising rates.
Improving credit available at a time of likely rising interest rates is highly welcome. Many would-be first-time buyers who have been more focused about getting a mortgage (even at a higher rate) than with low rates.
All in all, existing and new home sales will be rising. Combined, there will be 5.8 million home sales in 2015, up 7 percent from last year. Note the sales total will still be 25 percent below the decade ago level during the bubble year. Home prices will be rising at 7 percent. For the industry, the business revenue will be rising by 14 percent in 2015. The revenue growth in 2016 will be additional 7 to 10 percent.