STRONGER ECONOMIC FUNDAMENTALS EXPECTED TO DRIVE INCREASES IN HOME SALES

Improvements in economic fundamentals, notably employment growth among millennials, will fuel significant increases in home sales and housing starts and a modest rise in home prices in 2015, according to CoreLogic's 2015 Housing Outlookreleased earlier this week.

Sam Khater, deputy chief economist for CoreLogic, predicted an increase of 9 percent in home sales and a 14 percent spike in housing starts for the coming year in the report.

"In 2014, the post-crisis economic expansion celebrated its fifth birthday and the main economic drivers of demand, such as consumption and capital investments, experienced steady improvement," Khater said in the report. "Employment grew at an average of 2.0 percent on a year-over-year basis for the three months ending in November 2014, the strongest rate since the three months ending in March 2006, which was the peak employment growth of the last economic expansion."

Employment grew at a rate higher than the national average (3 percent, as opposed to 2 percent) for the 25 to 29 age group, which is good news for housing, because this age group is the key first-time homebuyer segment. Steadily falling oil prices, which are down 45 percent since June, provide more economic growth tailwind going into next year. The drop in oil prices reduces energy-related expenses not just for driving, but for residential real estate also, according to Khater.

The stronger economic fundamentals are expected to drive an increase in demand for housing in 2015; sales are expected to jump by 9 percent, up to 5.8 million from the 5.3 million reported for 2014. Housing starts are expected to increase by 14 percent next year, up to 1.1 million. While the upturn in housing starts is healthy, it is still 23 percent below the average of 1.45 million for the last 50 years, Khater said.

Mortgage rates fell below 3.9 percent in December for the first time since May 2013 when a spike in rates caused a slowdown in home sales. The falling rates have not translated to lower prices, however, as price-to-income and price-to-rent ratios remain high. This means home price growth will be muted during the coming year, according to Khater. Mortgage rates are not expected to increase much in 2015 due to low inflation.

Khater said in the report that an analysis of the three main drivers of underwriting (debt-to-income ratios, loan-to-value ratios, and credit scores) revealed that purchase underwriting remains tight despite all the discussion in the last year around loosening the credit box.

"While there has been clarification on GSE loan put-backs and new low down payment products, the impact of both will be fairly modest because the weak originations market reflects not just a modestly tight supply of credit, but very weak demand," Khater said.

Overall, the lower oil prices could play a key role in the recovery of the housing market and the economy overall. Lower oil prices have led to lower transportation and home energy costs, which not only save consumers money but increase consumer confidence, increasing the likelihood that they will spend money on big ticket items.

DS News (December 31, 2014)