Loosening mortgage credit conditions, decent jobs gains and an eventual acceleration in wage growth will help home sales to rise over the next 12 months, according to Paul Diggle, property economist at Capital Economics.
However, he warns, improvement in selling conditions is also tempting sellers back to the market and triggering an expansion in homebuilding.
“This supply response will see house price inflation fall to around 4% per annum by the end of this year and sustain that level for the next few years,” Diggle says.
On a broader note, GDP growth has picked up substantially and the message from the incoming activity surveys is that growth will remain strong now that credit conditions are easing and the fiscal drag is fading.
“Despite the slowdown in August, we expect monthly non-farm payrolls to increase by 200,000 or so over the next 12 months, which will keep unemployment on a downward path. In turn, dwindling labor market slack means that wage growth will soon accelerate,” Diggle says.
The mortgage market has joined other sectors, such as autos, in seeing a loosening in credit conditions.
While figures from the Mortgage Bankers Association suggest that this hasn’t yet translated into a rise in mortgage applications, lenders responding to the Federal Reserve’s Senior Loan Officer Survey report seeing a strong increase in demand for mortgage loans.
“Either way, sales of existing homes have climbed back to long-run norms, while sales of new homes finally appear to be improving as well,” Diggle says. “There is still plenty of scope for the latter to rise from here, particularly now that the pool of would-be first-time buyers is finding it easier to access mortgage finance.”
Despite the improving sales market, house price growth is slowing rapidly as Capital Economics had forecast.
“On balance that’s good news as housing is approaching, and on some measures has exceeded, fair value. The scope for rapid, sustainable, price gains is increasingly limited,” he says. “The slowdown in house price growth reflects the steady rise in supply. Homeowners have become more willing to list their homes and homebuilders have brought an increasing number of new homes to the market.”
Diggle says that this supply response will continue to weigh on house price growth, which he expects to slow from 6.2% year-over-year in the latest Case-Shiller reading to 4% year-over-year by the end of the year.
He says that home-price growth will continue around that pace for the next few years, which is somewhat more optimistic than Lawrence Yun’s estimate from the National Association of Realtors.
Strong jobs growth combined with still-low interest rates could see housing demand rise rapidly and prices follow, Diggle says, but that seems an unlikely future.
“More likely, though, is that retreating investors and cash buyers leave a hole in housing demand that repeat and first-time buyers are unable to fill, leading to weaker price growth than we are anticipating,” he says. “Slowing house price inflation means that the total returns from housing will decline over the next year or two. The upshot is that institutional investors will continue to pull back from all but the most undervalued markets such as Ohio. But the rental vacancy rate is low and rents are on an upward path. Thus the sector should be attractive to Mom and Pop investors for a while yet.”