Nov. 2015-Opportunity Knocks

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Th e M Rep o RT | 25 Feature M any homeowners during the downturn must have felt like Tom Hanks' character in Cast Away. Trapped as the water rose up around them, with little in the ways of help or hope. The housing sector has come a long way in the full decade since home prices began their initial decline. "Real residential investment has vastly outperformed the overall U.S. economy by record- ing growth rates of 10.1 and 6.6 percent in the first and second quarters of 2015, respectively," said Anthony Chan, JPMorgan Chase's chief economist. "This compares favorably with U.S. real GDP growth over the same period of just 0.6 and 2.3 percent." The NAR Homebuilders Housing Market Index (HMI) re- cently achieved its highest reading since October 2005. Fueling fur- ther optimism in the sector was the report by the U.S. Census Bureau and the HUD that hous- ing starts in July climbed to their highest level in nearly eight years. Doug Duncan, chief economist at Fannie Mae, echoed the hous- ing expansion sentiment, citing continued improving labor mar- ket conditions, rising income, and still-low mortgage rates. Single- family starts and new home sales will be stronger in 2016, he said, although gains in existing-home sales should moderate somewhat while multifamily should be es- sentially flat. Frank Nothaft, SVP and chief economist at CoreLogic, expects close to 3 million new jobs in the coming year, mortgage rates to stay low "but higher than they are today," and consumer con- fidence to remain solid. "Based on this backdrop, home sales are projected to rise about 5 per- cent in 2016, and the CoreLogic national Home Price Index™ is forecast to appreciate 4 to 5 percent." Confidence Game C onsumers are more confi- dent when they have jobs, and that's when the housing market hums. The JPMorgan Chase and Fannie Mae econo- mists both pointed to job cre- ation as a key indicator of the health of not only the mortgage market, but also the economy as a whole. As for the latter, both also emphasized the importance of consumer spending, which accounts for approximately two- thirds of all economic activity. "We believe the health of consumers is key to the economy and the housing market," Duncan said. "Indicators that fundamen- tally impact consumers include job creation, wage and salary in- come, and consumer confidence." Chan said there is little doubt that holding a job, in addition to good credit, is a "crucial prereq- uisite" for securing a mortgage when purchasing a home. "The unemployment rate has plunged from a high of 10.0 percent to a current reading of 5.3 percent as U.S. job openings have surged to record levels," he said. "Interestingly, our analysis reveals that both U.S. consumer confidence and the HMI tend to exhibit a high correlation, indicat- ing that a healthy housing market is usually accompanied by strong consumer spending growth." Approximately 3.1 million non- farm payroll jobs were created in 2014 with at least 2.5 million jobs to be delivered this year, accord- ing to Chase's chief economist, who explained the drop off as the natural tightening of the labor markets. Of course, interest rates always get a lot of attention, from first- time homebuyers to veteran resi- dential developers and beyond. The Fed's much talked about re-tightening of fiscal policy, which would be its first interest rate increase since 2006, would increase the cost of borrowing money to buy a house. Duncan said, "We expect mortgage rates to increase only gradually over the next year given ongoing international uncertain- ties, continued monetary easing around the globe and an expected slow pace of monetary tightening by the Fed." Fannie Mae's chief economist added that, if the Fed raises rates as expected, foreign institutions could seek to profit from any carry trade and create capital flows into U.S. capital markets, which would hold long-term rates down and increase refi- nance volumes. He keeps a close eye on indicators directly tied to that spending, such as personal consumption expenditures, retail, and auto sales. "I would say housing is not do- ing as well as the car market, but a lot better than the labor market," said Dean Baker, co-founder of The Center for Economic and Policy Research (CEPR). "If job growth continues at near its current pace, then we will probably start to see some real wage gains by the end of the year or early next year." By Brian A. Lee Course

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