March 11th, 2016 5:23 PM by Dana Bain
Reasons to Be Enthusiastic about
the Housing Market
After a strong rebound from the depths of the
recession, the housing market has leveled off, but opinions differ about its overall trajectory.
Some housing experts predict the housing
market in the U.S. will fundamentally change as millennials and their
successors, Generation Z, mature and seek to rent rather than own. Others predict that rising interest rates will dampen the housing market.
All signs suggest that the U.S. housing
market is moving into a period of strength and stability. These four specific
elements will buoy the housing market over the next several years.
Low Interest Rates
A demand among investors for safe havens with reasonable yields has kept
mortgage rates very low despite the federal funds rate increasing in December. Now, the Federal
Reserve is signaling that it may delay future rate hikes, which points to
mortgage rates remaining at rock-bottom levels for the foreseeable future.
For some context, 30-year mortgage rates at
or below 4% are an anomaly. Over the last 225 years, mortgage rates have
fluctuated constantly. But the average rate hovers around 6%. From this
historical perspective, rates remain very affordable for homeownership.
Job and Wage Growth Are Strong
There are a number of ways to slice and dice the employment figures released by
the U.S. Bureau of Labor Statistics, but the trend line has clearly been
overwhelmingly positive. After hitting an alarming 10% unemployment rate during
the depths of the recession, the U.S. economy has recovered to a healthy 4.9%
unemployment. Wages have been rising as well, which is a great sign for the
average homeowner or renter looking to buy. According to the Labor Department's
January report, average hourly earnings increased 2.5%
Millennials Are Maturing
The theory that millennials will eschew homeownership in favor of renting
forever is proving to be only a theory. The oldest millennials are now in their
mid-30s, and are forming families and entering a phase of life where living in
a home they own is suddenly very attractive. They may be late to the
homeownership party, but they are not going to stay away altogether. A
combination of factors has delayed the inevitable surge of homeownership by a
generation that is now the nation's largest in terms of population. Student
debt, a lack of affordable inventory and a desire for a different
housing product has all played into their delayed entry into homeownership. But
75 million Americans who are forming families and advancing in their careers
will not hold out forever. Expect them to have a large impact on the housing and mortgage
market for decades to come. One of the largest transfers of wealth in U.S.
history is also about to take place. Over the next decades, a total of more than $30 trillion will be passed from baby boomers to
millennials, fueling a housing boom that will be strong and long-lasting.
It's no secret that the housing meltdown damaged millions of
people's credit. Many of these homeowners have been sitting tight during the
two- to seven-year waiting period for their loan eligibility or credit to be
repaired. Since the waiting period typically starts at the date that the
foreclosure or short sale was finalized, many of these "boomerang buyers" are only now back in the market
for a home. RealtyTrac estimates that more than 7 million Americans lost their
homes in the recession. These boomerang buyers are on a rolling schedule of
eligibility for government-backed mortgages, or to be in a position where their
credit score is fully repaired. The number of boomerang buyers eligible to
return to homeownership will surge over the next year, peaking in 2018 at more than 1.5 million.
The U.S. housing market is subject to several
cyclical factors such as mortgage rates and economic cycles. But a convergence
of favorable factors in wage and job growth, mortgage rates and population
trends, will provide underlying strength for a stable and steady housing market
in the near future.