What This 4-Year Housing Outlook Really Means for You

In this series, professionals debate the state – and future – of their industry. Read more here, then write your own #MyIndustry post.

Since this is what I do for a living, this month's post was easy. In fact, you can download our entire housing market outlook by region here. We do forecasts to help business executives plan their business for the most likely scenario, knowing full well that the forecast will need to be adjusted when new information becomes available. With the topsy-turvy stock market and mortgage rates, we reserve the right to revise our forecast any time.

Virtually all of the national housing data continues to show improvement, despite a lot of truly negative economic news that will eventually affect housing demand. As we summarize below, businesses have clearly pulled back, while consumers continue to spend. The net result points to slower economic growth ahead, with much improved housing affordability. 

Businesses Struggling
Many businesses have entered a recession:

• Businesses spent less money in Q4 than Q3, which will officially be a business recession if they spend less again this quarter.
• Businesses have decreased the utilization of their plants, cut capital goods orders, and cut purchasing slightly.
• Businesses who sell overseas report less demand, and overseas sales are worth less in dollars.
• CEOs have less confidence, and plans to cut jobs have increased 42% compared to this time last year—although job growth should continue, as the number of open positions remains high.

Consumers Succeeding
Consumers see a much better world:

• Income growth now exceeds 3%, and with unemployment down to 4.9%, good employees finally have great negotiating power.  
• Expenses other than rent have declined, too, along with low inflation and the lowest gasoline prices in years.
• Mortgage rates have plunged, significantly increasing purchasing power.
• Consumer confidence has picked up, more people are quitting jobs in pursuit of better opportunities, and  more people intend to buy homes this year.

Housing Doing Just Fine
While the data has not been reported yet, we believe recent declines in the stock market will likely cause higher-priced home sales to slow, while falling mortgage rates and gas prices will stimulate entry-level buying. The net result should still make for a good 2016 nationally. We will watch job growth carefully as well as the apartment market. Apartment owners tend to feel changes in the economy first and are obviously impacted by entry-level home buying.

• Resale sales volumes have risen 8% in the last year despite very low inventory, and owner occupied purchases have risen 12% over the same time period. New home sales have increased as well. 
• Resale home prices have risen 5%+ in the last year according to every home price metric we track.
• Repair and remodeling spending continues to improve.
• Mortgage credit conditions continue to improve, and the huge mortgage industry PR with two Super Bowl ads should help spread the word.

Virtually all of the Leading Economic Indicators point to continued growth ahead, although we are concerned that stock market investors see something much worse, as a number of the home builders and banks now trade below book value (the money that owners have invested in the company, including retained profits).

Huge Regional Differences
As shown in the map above, huge regional differences persist. Housing in regional economies dependent on oil, defense spending, and selling manufactured goods overseas struggle, while the economies dependent on tourism thrive. The tech markets have been booming, but we believe those days are numbered. 

Locally, neighborhoods with newer, higher-density housing near jobs and entertainment generally outperform. They benefit from recent government investments in infrastructure, private investments in gentrification, and a social shift away from commuting. Interestingly, the home price discount available to commuters is as large as I have seen in my 27 years as a real estate consultant. I have to believe this huge discount will result in more demand and eventually rising home price appreciation in the outlying areas, despite the preference for living closer to the action.

Summary

While I am concerned about the many global uncertainties that exist, I do know that the number of people in their 30s will surge this decade, and many will choose to rent their own apartment or purchase a home, especially when they decide to settle down. Housing demand (best measured by local job growth), housing supply (best measured by construction levels and months of resale supply) and affordability (best measured by rent/income ratios for renters, mortgage payment / income ratios for first time buyers, and home equity by moveup buyers and retirees) will determine what the future holds.  Most markets have solid demand today and low levels of supply, while affordability varies greatly. All in all, U.S. housing should fare well in 2016.