Housing Sector Seen to Gradually Improve Through Next Year

Housing activity is seen to gradually improve next year with healthy underlying demand over the balance of the year and through 2015 despite sub-par sales in the first quarter of 2014, industry experts said.

Lawrence Yun, National Association of Realtors chief economist, said the U.S. population has been growing steadily, but job creation has not. “When you look at the jobs-to-population ratio, the current period is weaker than it was from the late 1990s through 2007,” he said. “This explains why Main Street America does not fully feel the recovery.”

Yun said that growth in the Gross Domestic Product slowed in the first quarter, and possibly contracted. “There are no fresh signs of recession, and the second quarter could grow about three percent,” he added.

Yun said the home sales-to-population ratio also has been below normal since 2008. Despite a large pent-up demand from years of below-normal home sales, inventory constraints and tight credit conditions continue to impede the market, in combination with strongly rising home prices and higher mortgage interest rates.

Although existing-home sales rose more than nine percent to nearly 5.1 million in 2013, sales activity retrenched during the past six months. Even with gradual improvement moving forward, they are projected to decline about three percent for the year to just over 4.9 million, but should trend up to more than 5.2 million in 2015.

Because of tight inventories and rising sales last year, the median existing-home price rose 11.5 percent to just over $197,000. Home price growth is likely to moderate from more new home construction, with the median price increasing about 6 percent in 2014 to $209,000 and reaching nearly $219,000 next year as market conditions begin to balance.

An upside of rising prices is a recovery in home equity. “Based on our forecast for this year, the median home equity gain over three years is expected to be $40,000,” Yun noted. “A gap between new and existing-home prices from rising construction costs shows that prices are well supported by fundamentals in most of the country.”

He expects the Federal Reserve to end tapering of monetary policy by the end of the year and to hike the Fed funds rates in the first quarter of 2015.

Although the pattern is uneven month-to-month, mortgage interest rates are forecast to gradually rise, with the 30-year fixed rate averaging 4.7 percent this year and 5.5 percent in 2015. “Inevitably, rising mortgage interest rates will hurt housing affordability,” Yun said.

Housing starts have stayed below 1 million a year for the past six years, but need to reach the long-term average of 1.5 million to balance the market. “Because of the prolonged slowdown in construction, we now need 1.7 million housing starts per year to catch up,” Yun said. While improving, housing construction is seen at nearly 1.1 million this year and approximately 1.4 million in 2015.

The sluggish recovery in housing starts is impacted by construction costs rising faster than inflation, labor shortages in the building trades, and the difficulty for small local home builders to obtain construction loans. “Onerous financial regulations are preventing small banks from originating construction loans,” Yun said.

A separate report by NBC News showed realtors are “selling better” than they have since the recession and home owners and prospective home buyers are now warmer to the idea of buying homes with a heftier price tag in Missoula. This had been quite apparent among home buyers and investors who have attended this year’s Parade of Homes, which is an avenue for home builders and remodelers to showcase their work.   

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