Saturday
October 25, 2014

Continued Housing Growth Seen, But Inflation Looms

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Continued Housing Growth Seen, But Inflation Looms

NAR Chief Economist Lawrence Yun provided a peek at the economic future of residential real estate at the REALTORS® Conference & Expo.

Home sales volume and prices are poised to keep improving over the next two years, outpacing growth in the broader economy, but look for moderate inflation to appear starting in 2015, making it harder for today’s renters to become home owners, NAR Chief Economist Lawrence Yun told thousands of REALTORS® Friday in a residential economic update at the REALTORS® Conference & Expo in Orlando.

Yun is forecasting 4.64 million home sales this year, 5.05 million next year, and 5.3 million in 2014. Home price appreciation will see a similar positive upward trend, with the median existing-home price reaching $176,000 at the end of this year, $185,000 next year, and $195,000 in 2014. By 2015, the national median home price is expected to have risen by 15 percent from today’s level. 

Contributing to the growth are the slowly improving economy, job creation, and an increase in household formation after a hiatus during the downturn, Yun said.

Rising rental rates are also contributing, as renters who are able to get financing in today’s tight credit market find it makes more financial sense to buy while home prices remain relatively affordable. 

But inflation could pose a problem starting two years down the road, Yun said. Although inflation has remained tame today—at about 2 percent per year—starting in 2015 it could jump to between 4 and 6 percent a year. That will be a short-term boon to home owners, as they enjoy an increase in price appreciation, but that would make home ownership harder for the growing number of renters today who aspire to buy. Not only would prices rise, but mortgage rates would go up as well.

The continuing federal deficit is a big reason inflation could jump in the future. But another cause might be the Federal Reserve buying mortgage-backed securities to help keep rates low. At some point soon, the Fed will have to start unwinding its position. When it does, interest rates and inflation will rise. Rental rates are expected to keep heading up as well, and that’s the biggest part of the Consumer Price Index. 

Yun and Mark Vitner, managing director and senior economist for Wells Fargo Securities, who also spoke at the forum, said Congress will have to start addressing the federal deficit soon, starting with an agreement to avoid the ‘fiscal cliff” the country faces at the end of this year as hundreds of billions in tax cuts expire. Both Yun and Vitner expect Congress to take short-term action to avoid that, but the pressure will be on to take long-term action after that. 

As a result, although housing is expected to keep improving, this big question mark will hang over the real estate market and the broader economy over the next few years. 

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