We all have a big financial stake in housing — as homeowners, renters, landlords and/or taxpayers.
Let’s consider the major macroeconomic trends in 2016 that will significantly impact those stakes.
● Homeowners should enjoy another year of solid gains in house prices. Prices have been moving steadily higher since the housing bust hit bottom four years ago and should post another gain in the middle single digits. With a bit of luck, prices nationwide could reach close to the all-time peaks seen in the housing bubble a decade ago.
This time, however, house prices are on very solid foundations; they are supported by homeowners’ incomes. In the bubble, too many of us got into homes we couldn’t afford by committing to mortgages that made no financial sense. Of course, millions defaulted on these loans, resulting in the financial crisis and the Great Recession.
No one is getting crazy mortgages today. Regulatory changes in the wake of the crisis and chastened (thus much more cautious) mortgage lenders make that all but impossible.
The financial affliction of negative homeowners’ equity, in which the house is worth less than the mortgage due, is fast fading. At the worst of the problem, close to 17 million homeowners were underwater. By the end of 2016, that should be down to a more typical 5 million homeowners.
Market conditions should be good for owners looking to sell their homes. The historically low number of new and existing homes for sale makes it even more of a seller’s market. Many homeowners appear to have a psychological antipathy to selling until prices have fully recovered from the bust, so this could be an auspicious time for those willing to sell.
Home-buyers have to grapple with the higher prices and lack of inventory, but they should benefit from an improving job market, continued low mortgage rates and easier credit. With the economy set to achieve full employment in coming months, the so-far lackluster wage growth is picking up. Fixed mortgage rates are unlikely to stay below 4 percent for much longer, but they don’t appear set to rise sharply either.
● First-time home-buyers, in particular, should have an easier go of it. The Federal Housing Administration, the government agency that primarily helps first-timers get mortgages, cut its fees last year and may do so again soon as its finances continue to improve.
Fannie Mae and Freddie Mac, the big mortgage lenders owned by taxpayers since the crisis, are also working to lower the high credit bar many potential buyers have struggled to get over. The credit scores that borrowers need to get a loan are still very high by historical standards, but they have finally begun to normalize.
● For renters, 2016 will be a difficult year, as rents continue to rise strongly in most parts of the country. The problem is that demand for rental units has been outstripping supply, and vacancy rates are now about as low as they have been in 30 years. Fueling demand are the millennials who are finally finding jobs and striking out on their own, along with households that have lost their homes in foreclosure, and more empty-nesters looking to downsize and simplify.
Builders are ramping up construction of apartments, but in most places they still aren’t meeting the demand, especially for affordable rental units in urban centers. Rents will continue to rise strongly.
● It is worth noting that builders have also been slow to increase construction of new single-family houses, which are also in increasingly short supply. Housing has swung from being vastly oversupplied in the bust to being in what more and more is a shortage. This is a problem mainly for affordable, starter homes.
Of course, quickly rising rents are a boon to landlords. It’s no exaggeration to say that 2016 may be the best year ever for those fortunate enough to own multifamily property. Vacancy rates are low, rents high, and prices for apartment complexes have never been better. Wealthy foreign investors from places including China and Germany are clamoring to own U.S. real estate.
● In general, taxpayers should be pleased with 2016 as they reduce their support to the housing market. During the crisis, the government had no choice but to step into the void left by the failing financial system and ensure that homeowners could still get a mortgage. Thus, taxpayers’ takeover of Fannie and Freddie; they are too big to fail.
Fannie and Freddie will remain under government stewardship for the foreseeable future, but they are selling to private financial institutions more of the risk that they take on when backstopping mortgage loans. This risk-sharing could be expanded even more, as private investors seem very interested in taking on more risk, and Fan and Fred should oblige.
To sum up, homeowners, landlords and taxpayers should have a good 2016; renters, not so much. Gauging trends in housing is often an intrepid affair, but these trends seem firmly in place for the coming year.
Zandi is the chief economist at Moody’s Analytics.