With robust home sales, record prices and mortgage rates still near historical lows, the housing market has rebounded strongly from the depths of the Great Recession. Experts expect this healthy market to continue through the remainder of 2017 and well into next year.
“Existing home sales are at a 10-year high,” said Adam Desanctis, economic issues media manager with the National Association of Realtors. “It’s the strongest since the economic downturn. We’ve seen multiple years of job growth and unemployment below 5%, and wages have ticked up in recent months.”
“The housing market has improved a great deal from the trough in the housing cycle,” said Frank Nothaft, chief economist at CoreLogic, a real estate technology and analytics company known for producing the S&P CoreLogic Case-Shiller Home Price Index.
According to Nothaft, the steady decline in delinquency and foreclosure rates since the end of the economic crisis are indicators of fundamental strength in housing. Yet these rates are still higher than they were prior to the housing market’s peak in the mid-2000s.
“It’s not completely back to normal,” he said. “While home sales and housing construction have improved a great deal over the last six or seven years, they are still below the typical run rates we would see in a normal housing market.”
Despite positive market conditions, industry experts are keeping an eye on some concerning trends, such as record low inventories of homes.
“It’s a very challenging market due to low inventory,” Desanctis said. “In many parts of country, as job creation has grown, new home construction has not kept up. The supply is way below demand.”
Desanctis cited the increasing costs of building materials and land, along with a critical labor shortage in the home construction sector, as factors contributing to reduced new home inventory.
“During the downturn, a lot of people were let go or moved to another sector,” Desanctis said. “We are seeing severe labor shortages in the housing construction industry, especially on the West Coast.”
Nothaft sees potential warning signs in the number of homeowners who still maintain negative equity in their homes.
“Home equity wealth, the difference between a homeowner’s home value and mortgage indebtedness, has grown a great deal from the trough in the housing price cycle,” Nothaft said. “However, a higher than normal percentage of homeowners are still underwater. It’s nowhere near as bad as in 2009 and 2010, but it remains elevated relative to what we had seen 10 or 15 years ago.”
Despite a three-month decline in pending home sales, and flat existing home sales, the NAR is currently forecasting an annual rate of 5.63 million in home sales for 2017. Although this forecast has been adjusted downward since earlier this year, it still represents the best rate of activity in a decade.
Nothaft agrees with the NAR’s projection of rising home sales, which he predicts will be driven primarily by an uptick in new home construction activity in the second half of the year.
“I do think existing home sales may remain flat, which is not a big change,” he said. “Where we’re going to see the gain in home sales will be from new construction. New single-family housing starts are still running at a recession-era level even though they’ve increased steadily every year since 2009. I think we’ll see housing starts continue to rise even with somewhat higher mortgage rates, adding to new home sales.”
The NAR projects mortgage rates to average 4.1% for 2017, and rise modestly to 4.6% in 2018.
“Interest rates rose to the 4.3% range earlier this year,” Desanctis said. “Rate sensitivity is felt most strongly at the lower end of market, with first-time buyers. Rates have since fallen a bit to below 4%, helping to preserve affordability. Overall, mortgage rates have not made much of a difference in home sales in this cycle.”
“Even if mortgage rates rise from today’s 4% for 30-year fixed rate to 4.5% a year from now, that’s still historically a very, very low mortgage rate, which is why it won’t hit home sales as strongly,” Nothaft added.
Industry watchers do not anticipate another housing bubble like the overheated market that precipitated the 2007-2008 housing crisis. At least not yet.
“The rising home prices we saw in the 2000s were due primarily to lax lending standards,” Desanctis said. “We are not entering bubble territory; borrowers have good credit, high income levels and steady employment. In the San Francisco Bay area and other higher-priced areas, we could see some cooling of home prices, a semi-adjustment period, but if jobs continue to grow, and if building activity increases, we anticipate a gentle easing of the market.”
Despite national housing prices recently matching their 2006 peak in nominal terms, prices have not yet approached that lofty level in real terms, analysts say.
“They’re approximately 18% lower once you adjust for inflation,” Nothaft said. “This gives me some comfort we are not in a bubble market like we were in 2006.”
Still, Nothaft is keeping an eye on some indicators of an overheated market.
“I would look at two or three different signals and see if they’re pointing in the same way,” Nothaft said. “If I saw an increase in flipping activity in a local market that could be a warning sign. If you see a market where credit is too easy, where homebuyers are getting loans with very little down payment, that could be a warning signal that prices are being bid up. Another one is vacancy rates. If you see prices going up at a significant pace, and yet there are a lot of vacant homes, that’s a big red flag. That shouldn’t be happening.”
Overall, experts maintain a cautiously optimistic outlook for the housing market over the short- to mid-term.
“As long as the economy continues to grow at a 2% to 2.5% pace, I think we’ll continue to see more home sales, more construction, but perhaps also more affordability issues in the marketplace,” Nothaft said.
Freelance writer Ted Goldwyn contributed to the writing and research of this article.