The Three Percent Solution

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Th e M Rep o RT | 41 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t ANALYTICS the latest Fannie mae economist Weighs impact of Jobs data on Housing Things may be looking up in the job market, but that doesn't necessarily spell good news for housing. t he U.S. labor market reported a strong gain of 252,000 jobs on the payrolls for December, according to Bureau of Labor Statistics data. But the underlying data may not be so encouraging for the housing market, according to Fannie Mae Chief Economist Doug Duncan. December's job gain was close to 2014's average monthly increase, and 2014 was the best year of job growth in the United States since 1999. Still, Duncan said in a prepared statement recently that while job gains were generally solid throughout 2014, there were other aspects of the latest BLS report that were "underwhelming"—specifically, year-over-year wage growth of just 1.7 percent, the lowest in two years. Also, while the nation's unem- ployment rate took another dip of 0.2 percentage points down to 5.6 percent, its lowest level in six and a half years, that decline was accompanied by a drop in labor force participation down to 62.7 percent, tied for the lowest level since October 1977. "So far, the diminishing slack in the labor market has not yet translated into stronger wage gains, which sends a disappoint- ing signal to the housing market," Duncan wrote in his statement. "We fear that housing may, again, lag the progress of the overall economy this year, as evidenced in results from the Fannie Mae December National Housing Survey, which shows a flat-line in consumer housing sentiment amid rising optimism in the gen- eral view of the economy." It remains to be seen if the lowering of Federal Housing Administration (FHA)'s mortgage insurance premiums by 50 basis points down to 0.85 percent will change Americans' currently tepid attitude toward housing. The change is specifically meant to benefit first-time homebuyers, indicating that FHA is attempting to jump-start household formation. FHA estimates lowering their insurance premiums will result in hundreds of thousands of new homes purchased in the next few years. Duncan said he believes that in order for household formation to flourish, there must be more growth in Americans' income. "While we expect economic growth to strengthen to an above-par pace this year, our view for the housing market remains cautious, as we believe that meaningful income growth needs to occur to spur household forma- tion, which has been frustratingly anemic in the current economic expansion," Duncan wrote. "That dependence on income growth acceleration means the economy should drag housing upward rather than housing being a leader in growth acceleration." Still, reports from economists at CoreLogic and Wells Fargo released in December indicated they believe housing will rebound in 2015 after a disappointing 2014, and they cited improvements in the U.S. labor market as a main reason why. continued growth Brings U.s. Home values Up $1.7t in 2014 The total value of the U.S. housing market indicates the force with which the residential space can drive the overall economy, says Zillow economist. H omes across the country gained an additional $1.7 trillion in value in 2014, leveling off slightly from 2013's increase as appreciation lost momentum in most markets. Looking at the past year of growth, Zillow estimated U.S. homes to be worth a combined $27.5 trillion by the end of 2014, a 6.7-percent increase over 2013. In 2013, the company valued the country's housing stock at roughly $25.7 trillion, an improvement of 7.9 percent from the year prior. "Looking at the total value of the U.S. housing stock proves just how huge and important the housing sector is to the overall economy," said Stan Humphries, chief economist at Zillow. "Virtually nowhere else will you see gains of more than a trillion dollars in one year represent only single-digit percentages of the total market." Homes lost about $1.6 trillion in value from the end of 2006 through the end of 2011, Zillow estimates. By the end of this year, the company predicts home value growth will have slowed to an annual pace of 2.4 percent. At the same time, Humphries predicts the housing market will be- come more of a driving force in the country's economic recovery, having played a less important part last year. "As we conclude 2014 and look ahead at 2015 and beyond, housing will play a bigger role in the broader economic recovery. As the job market improves and more households form, more people will search for homes to buy and rent, which will translate into more people buying appli- ances and home goods and lead to more jobs for home builders and contractors," Humphries said. "Housing is well positioned to continue the great strides already made this year."

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