A Banner Year for Housing Expected

Economists are expecting more home sales and house building in 2016 even as mortgage rates are set to rise.  Thanks to improved demand and growing confidence in the economy, economists at Merrill Lynch are projecting housing starts to rise in 2016 and reach their historical average rate “by the end of 2017.”

Economists are expecting more home sales and house building in 2016 even as mortgage rates are set to rise.  Thanks to improved demand and growing confidence in the economy, economists at Merrill Lynch are projecting housing starts to rise in 2016 and reach their historical average rate “by the end of 2017.”

Merrill Lynch’s Michelle Meyer wrote in a note that home building and sales are still growing at a relatively slow pace and have fallen below their historic norm, but are rising to reach a robust rate within the next two years. “We expect continued improvement in homebuilding and sales in 2016 and 2017, but still far from a V-shaped trajectory,” Meyer said.

Meyer said home prices will likely rise at a low rate next year, but existing home sales growth will prove strong, rising 5 percent in 2016 before slowing to 3 percent in 2017. New home sales are likely to be much higher, at 10 percent in 2016 and 14 percent in 2017.

Demographic Crisis

New home purchases slow because young adults remain in their parents’ homes longer, Meyer said, although she did not comment on the declining real wage growth of young people to account for the trend.

“Starting in the early 2000s, and accelerating post crisis, there is a rising share of ‘grown-up’ children who live with their parents. While this is partly due to the Great Recession and slow recovery, there could also be some secular changes related to delayed marriage. This could imply a somewhat lower equilibrium pace of housing starts,” she said, adding that recent data points to “a surge in household formation” that could improve home sales and home demand in the next two years.

Housing Starts and Existing Homes

In October 2015, building permits were 1.15 million at a seasonally adjusted rate. That represented a 2.7 percent increase from the prior year, and 4.1 percent above September’s rate. New housing starts have shown a steady increase throughout 2015, indicating demand for new houses has improved, although the trend remains far below historic norms.

However, a short-term slowdown in housing starts did appear in October that could indicate the trend line is shifting slightly towards a more negative downturn. Housing starts in October fell 1.8 percent from the prior year and were only 1.06 million. Meanwhile, existing home sales rose in October to 5.36 million, a 3.8 percent increase from a year ago.

Existing home sales have returned to levels seen in the early 2000s—before the housing boom and bust that ended in the Global Financial Crisis.  In addition to the Merrill Lynch note, other investment banks project a similar improvement in the housing market, despite increases in mortgage rates due to the Federal Reserve rising its Federal funds rate target.

Some economists counter that higher borrowing costs and flat wages, combined with high student loan debt and limited job security in many parts of America, will limit demand for housing.