Steady employment and economic growth, pent-up demand, affordable home prices and attractive mortgage rates will keep the housing market on a gradual upward trend in 2016, according to economists who participated in National Association of Home Builders (NAHB) Fall Construction Forecast Webinar. However, persistent headwinds related to shortages and availability of lots and labor, along with rising materials prices are impeding a more robust recovery.
"This recovery is all about jobs," said David Crowe, NAHB chief economist. "If people can get good jobs that pay decent incomes, the housing market will continue to move forward."
The good news, Crowe added, is that total U.S. employment of 142 million is now well above the previous peak of 138 million that occurred in 2008.
The one caveat is that job growth has been concentrated heavily in the service sector, which tends to pay lower wages than goods producing jobs.
Meanwhile, home equity has nearly doubled since 2011 and now stands at $12.5 trillion.
"The single biggest asset in most people's portfolio is the home they own," said Crowe. "That's important because the primary purchasers of new homes are the sellers of existing homes. The more equity they have, the more comfortable they feel about purchasing a new home."
And while mortgage interest rates are expected to rise over the near-term, averaging 4.5% in 2016 and 5.5% in 2017, Crowe said this is not expected to have an impact on the housing recovery. "As the economy gets better, job and wage growth should keep pace. So even though mortgage rates will rise, they will still be low by historical standards and very affordable."
Crowe noted several factors that are hindering a more robust recovery. Citing an NAHB survey of its members, 13% of builders reported the cost and availability of labor was a significant problem in 2011 and that concern jumped to 61% in 2014.
Turning to the forecast, NAHB is projecting 719,000 single-family starts in 2015, up 11% from the 647,000 units produced last year. Single-family production is projected to increase an additional 27% in 2016 to 914,000 units.
Residential remodeling activity is forecasted to increase 6.8% in 2015 over last year and rise an additional 6.1% in 2016.
Looking at home buyer preferences, Trulia Housing Economist Ralph McLaughlin said that contrary to popular belief, millennials prefer to own a home in the suburbs rather than rent in the cities.
"Many believe that home buyers are bucking the trend of previous generations in that they want to live in urban areas and want to rent," said McLaughlin. "What we are finding from our surveys is just the opposite. Among millennial renters, almost 90% say they eventually want to purchase a home. That is significantly higher than Gen Xers, who were hurt by the recession, and quite a bit more than current baby boomer renters, who are at 40%."
However, an overwhelming majority of millennials, who are still starting households and paying off college debt, say it will be at least two years before they are ready to buy.
Roughly half of all Americans prefer to live in suburban areas, about a quarter prefer urban areas and just over 20% prefer rural communities, according to a Trulia survey conducted last November.
Delving below the national numbers, NAHB's senior economist, Robert Denk said that housing market conditions are improving in all regions, but the pace of recovery continues to vary by state and region.
"We've gotten to the point in the recovery where we no longer have problems that came with the housing bust," he said. "It now is really a matter of housing markets reconnecting to the fundamental drivers, and that is employment. Production has been rebounding in all regions, prices have been moving up and new foreclosures are back to more normal levels."
For more information, visit nahb.org.