Employment Growth Hitting Housing Sweet Spot

It has been a long time coming butrnCoreLogic says the improving employment numbers are strongest among preciselyrnthe demographic the housing industry has hoped for, the age group most likelyrnto be first time home buyers.   The country has been waiting for several yearsrnfor so-called Millennials – those born roughly between the early 1980s and thernearly 2000s – to begin forming households and buying homes, but impeded to somernextent by poor employment prospects and high debt levels they have delayed bothrnof those steps.  </p

CoreLogic’s 2015 Housing Outlook notes that the post crisis economic expansion,rnjust ending its fifth year, is now seeing steady improvement in the mostrnimportant of the economic fundamentals, such as consumption and capitalrninvestments.  Among themrnemployment grew at an average of 2.0 percent year-over-year in the three monthsrnended in November, the strongest growth since March 2006.  One subset of Millennials, those now betweenrn25 and 29 years of age, had employment growth of 3.0 percent.  Not only have their employment prospectsrnimproved more than the population as a whole, but CoreLogic says younger households exhibit morernmobility and higher marginal tendencies to consume from income, so strongerrnemployment growth should manifest itself in higher spending. </p

Therncompany sees this playing out well for housing. rnHome sales, it says,rnwill increase by 9 percent in 2015 and housing starts by 14 percent while homernprice growth is expected to moderate.   CoreLogic sees overall housing salesrnincreasing to 5.8 million from 5.3 million this year while there will be 1.1rnmillion housing starts.  While therncompany calls the latter jump in construction “healthy” it says it is still 23rnpercent below the 1.45 million starts the county has seen on average over thernlast 50 years.  </p

Plummeting oilrnprices, down about 45 percent since June, helped economic fundamentals and willrnbe a tailwind for growth going into next year. rnCoreLogic says U.S. households spend more than $1,800 on energy-relatedrncosts annually and 22 percent of that energy consumption is due to residentialrnreal estate so it isn’t just the driving-related savings that will put morernmoney in consumers’ pockets, the drop will also reduce energy-related expensesrnfor residential real estate. </p

Interest rates,rndespite some ups and downs over the last 18 months, remained relatively low butrnhome prices did not.  “It is clear thatrnthe low-rate environment has benefited home prices,” the company says, “asrnprice-to-income and price-to-rent ratios are high. This indicates home pricerngrowth going forward will be fairly muted.”</p

As to all of the talkrnabout “opening the credit box,” CoreLogic says it has been just that, talk. “Analyzingrnthe most recent data on the three main drivers of underwriting (debt-to-incomernratio, loan-to-value ratio and credit scores) reveals that purchasernunderwriting remains modestly tight and is not loosening yet. While there hasrnbeen clarification on GSE loan put-backs and new low down payment products, thernimpact of both will be fairly modest because the weak originations marketrnreflects not just a modestly tight supply of credit, but very weak demand.”</p

CoreLogic said twornclear trends are emerging as 2015 nears. rnFirst, those markets with the strongest sales and the highest home pricernappreciation are those with the strongest economies, particularly those tied torntechnology and energy.   This, of course,rnmakes dropping energy prices a two-edged sword. rn Of the top 10 housing marketsrnwith the greatest price appreciation four, San Francisco, San Jose, Austin, andrnSeattle, have high concentrations of technology industries and employmentrngrowth of 2.8 percent.   Two others,rnDallas and Houston, are being driven by strong energy economies and thernattendant spurt in household growth over the past few years.  </p

The second trend isrnthe faster growth of home prices at the lower end of the market.  During the fall of 2014 lower priced homesrnwere appreciating at about 1.5 times the rate of higher-end prices in all 25rntop markets.  “The strength of lower-endrnprices,” CoreLogic says, “reflects not just an affordability crunch, but also arnlack of home building for single-family starter homes.” </p

Some markets arernseeing stronger new home sales than what is essentially a stagnant U.S. market.  These cities, all in the south and including Charlotte,rnCharleston, Raleigh, Dallas, and Houston, are seeing strong price growth but thernrate of new construction is providing somewhat of a rein on appreciation.  </p

The company says therneconomy finally seems to be gaining sufficient momentum to give the supportrnhousing needs for a stronger recovery.  “Therncombination of stronger employment growth and especially millennial job growthrnmakes for solid footing for the real estate market. Moreover, the recent droprnin oil prices cannot be overstated, because not only does it directly lower therntransportation and home energy costs for households, but it also improvesrnconsumer confidence. And confident consumers are more likely to spend on bigrnticket items, which is sweet music to the ears of the real estate market.”

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