Tuesday
July 26, 2016

Holding Firm Against the Tide

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Holding Firm Against the Tide

2016 Forecast: Solid job gains and eased credit could help offset continued tight inventory and rising interest rates.

Steady U.S. economic growth will help lift home sales moderately in 2016, but persistent inventory shortages will continue to put upward pressure on prices, holding back first-time buyers. That’s a thumbnail of the year ahead for home sales, according to NAR Chief Economist Lawrence Yun.

In commercial real estate, prices of Class A buildings in major markets are likely to drop as investors lose their appetite for trophy properties, but bread-and-butter properties in markets across the country will stay stable in sales and prices, and vacancy rates will continue to fall.

Job gains will help offset short-term interest rate hikes by the Federal Reserve throughout the year. These upticks will likely lead to an increase in long-term mortgage rates. Yun is forecasting the average 30-year fixed-rate loan to increase to 4.5 percent by the end of the year, up from 3.8 percent in 2015.

Yun is forecasting the U.S. economy to grow by 2.7 percent, a reasonable gain when compared with the struggling growth of other advanced economies. Job gains have been key to the recovery in the housing market over the past several years, and Yun sees continued strength in this area. Look for 2.7 million new jobs, up from 2.4 million last year.

Higher interest rates, along with continued strong home price appreciation, which Yun expects to reach more than 5 percent for the year, will make affordability a stretch for many households, particularly first-time buyers. But there are signs lenders are easing up on the credit restrictions they’ve had in place since the downturn, which will contribute to offsetting higher costs.

Yun says housing starts remain key to bringing home price appreciation in line with household income growth. He anticipates new-home construction to hit 1.3 million units for 2016, up from 1.1 million in 2015. The gains will be welcome news but won’t be enough to bring down prices in any significant way, Yun says. What’s needed is for starts to surpass 1.5 million.

The disappointing construction numbers reflect the loss of small builders and a shortage of construction labor. Small construction companies have traditionally been the backbone of new-home building, but the difficult financing environment created by local banks since the downturn has thinned their ranks. That’s left much of the market to large builders, who have access to Wall Street funds to finance new projects but have little incentive to increase supply as long as strong demand keeps prices high.

On the commercial side, vacancies in three of the four major sectors—retail, office, and industrial—are expected to continue improving, while multifamily rates are holding steady. Prices are expected to be stable for most properties, but Class A properties in major markets, which saw big gains last year, are expected to fall.

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