According to a new economic forecast by the National Association of Realtors (NAR), existing-home sales are expected to be higher in 2015, and prices will remain at a healthier level of growth that benefits both buyers and sellers.
Lawrence Yun, chief economist of the National Association of Realtors, was joined onstage by Mel Watt, Director of the Federal Housing Finance Agency, who discussed issues preventing consumers from becoming homeowners, and Juan Castro, Secretary of Housing and Urban Development, who kicked off the forum with a video address.
Yun said existing-home sales this year got off to a slow start, but have recently shown stronger growth behind improvements in inventory, slower price gains and pent-up demand.
"The improving job market has consumers feeling more confident, and the rebound in home prices is building household wealth for homeowners and giving them the ability to sell after waiting the last few years," said Yun.
Existing-home sales this year are expected to fall slightly below 2013 (5.1 million) to 4.9 million, and then are forecasted to increase to 5.3 million next year and 5.4 million in 2016. Yun expects the national median existing-home price to rise 4 percent both next year and in 2016.
Despite the forecasted higher pace of sales in the next two years, Yun said headwinds do remain that will likely hold back the housing market from reaching its full potential. Citing NAR's monthly Realtors Confidence Index, which has decreased this year while consumer confidence has risen, Yun said Realtors are generally optimistic, but certain factors such as inventory shortages in parts of the country and tight lending standards may be playing a role in their recent dip in confidence.
"Multi-family housing starts have rebounded back to normal since the downturn mostly due to the strong demand for renting," said Yun. "On the other hand, single-family housing starts are still lagging as smaller homebuilders continue to face difficulty obtaining construction loans, and some have even gone bankrupt. Single-family construction still needs to increase to alleviate supply shortages and keep up with the pent-up demand."
Yun said renter households have increased by 4 million since 2010 while homeowner households have decreased by 1 million. "The typical homeowner today has a household net worth of around $200,000. Meanwhile, renters aren't benefitting from the rise in prices and are facing annual increases of their own in the form of higher rents."
Housing starts are forecast to hit 1 million this year and reach 1.3 million in 2015, which is still below the underlying demand of about 1.5 million, but should gradually normalize as lenders open their credit box more to builders. New-home sales are likely to total 440,000 in 2014, and increase to 620,000 next year.
In addition to lagging inventory and rising rents, Yun said tight credit standards, an increase in multi-generational households, and student debt are contributing to a decrease in first-time buyers to a low not seen since 1987. He recognized the new credit scoring calculation recently announced by Fair Isaac Corp., or FICO, as a positive for first-time buyers, but added that mortgage insurance premiums are too high in relation to default rates.
On the topic of access to credit, Watt said there are creditworthy borrowers who have enough income to afford monthly mortgage payments but not a large downpayment and closing costs. He said FHFA will offer loans with as little as 3 percent required up front from borrowers. Because downpayment size is not the best indicator of whether a borrower has the ability to repay, the enterprises (Fannie Mae and Freddie Mac) will also evaluate the full financial picture of a borrower, including credit histories and other compensating factors.
When NAR President-elect Chris Polychron asked Watt how to ensure that lenders will offer low down payment loans, Watt said FHFA has made efforts to clarify the rule for lenders and make credit more available, but it will take Realtors, lenders and regulators to break down these barriers and get the word out to the public.
After negative growth in the first quarter followed by solid expansion the next two quarters, Yun projects Gross Domestic Product to likely close at 2.2 percent this year and increase slightly to 2.7 percent in 2015. He said the good news is that the economy is in no danger of a recession; however, this year will likely mark nine straight years of subpar growth of less than the historical average of 3 percent."
Yun noted positive developments in the labor market this year that should support increased wages, which have barely kept up with the pace of inflation. Job growth is expected to surpass 2.5 million in 2014 and next year.
"The economy finally regained the 8.8 million jobs lost during the downturn and we're starting to see more workers showing a willingness to quit, which usually signals they're becoming more mobile and confident they can find a higher paying job," he said. "Rising wages and the current pace of rising rents would likely persuade the Federal Reserve to raise short-term interest rates, which have hovered near zero for six years."
Yun expects inflationary pressure to force the Fed to raise short-term rates in the first half of 2015. Mortgage interest rates are projected to increase to slightly below 5 percent next year and reach 6 percent in 2016.
"The impact of rising interest rates on affordability will be minimal as long as job creation keeps pace," he said. "Furthermore, if the credit box slowly begins to open up, that will also mitigate the impact of rising rates."