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The IBR is a publication of the Indiana Business Research Center at IU's Kelley School of Business

Housing: Positive Growth Expected for 2016

Director of the Benecki Center for Real Estate Studies, Kelley School of Business, Indiana University

The single-family housing sector found its way back to stable growth in 2015, while the multi-family housing sector continued its strong run. Consumer confidence, job growth and low interest rates are the primary drivers that bring potential homebuyers to the housing market. Considering these factors, along with an important projected increase in new single-family inventory, the single-family housing market is forecasted to continue on a positive path in 2016.

For example, the National Association of Realtors forecasts that existing home sales will increase 3.5 percent from 2015 levels, and new single-family home sales will increase 29.3 percent nationally (see Table 1). Housing starts are projected to increase 17.2 percent, with single-family units increasing 23.2 percent and multi-family units up 6.5 percent. Median home prices for both existing and new homes are expected to increase 4.1 percent.

Table 1: National Housing Outlook

History Forecast
2013 2014 2015 2016
Home Sales (thousands)
Existing Home Sales 5,090 4,940 5,284 5,468
New Single-Family Sales 429 439 527 682
Home Sales (% Change - Year Ago)
Existing Home Sales 9.2 -3.0 7.0 3.5
New Single-Family Sales 16.3 2.3 20.1 29.3
Median Home Prices ($ thousands)
Existing Home Sales $197.1 $208.3 $220.3 $229.5
New Single-Family Sales $268.9 $282.8 $288.9 $300.6
Median Home Prices (% Change - Year Ago)
Existing Home Sales 11.5 5.7 5.8 4.1
New Single-Family Sales 9.7 5.2 2.2 4.1
Housing Affordability Index* 177 164 162 129

* The housing affordability index measures the ability of a family earning the median income to purchase a median-priced home. Higher index values indicate increased affordability.
Source: National Association of Realtors, “U.S. Economic Outlook: October 2015”

Looking closely at these numbers one sees the importance of new home sales in 2016 and the critical need for new housing starts. The excess of existing home inventory at favorable pricing, resulting from the recent economic downturn, is mostly gone. To achieve strong numbers in 2016, new inventory must be added. The U.S. is currently experiencing a housing shortage, but home builders have been cautious in bringing new homes to market even while low interest rates have persisted. The good news is that builder confidence has been “steady or increasing,” according to a monthly survey conducted by the National Association of Home Builders.

The likelihood of continuing improvement in the single-family housing market in our nation’s cities and towns largely depends on job growth and how wages compare to that locale’s housing prices. When differentiating single-family markets across the country, it is important to remember that a key factor of mortgage qualification is a household’s monthly gross take-home pay relative to its payment for housing costs (the total of the mortgage payment, real estate taxes and home insurance). Holding all other things equal, communities with positive job growth and a favorable margin between wages and housing costs are more likely to experience a more stable single-family housing market than communities with narrower house affordability margins.

Thus, a less positive trend for the housing market nationally is housing affordability. The National Association of Realtors projects a change in this index from 162 to 129 from 2015 to 2016. Because employment is expected to stay strong and interest rates—while increasing—remain relatively attractive, this trend shouldn’t negatively impact 2016.

Another potential concern is the existence of bubbles in particular submarkets. In areas where demand was strong and supply was constrained, values may have increased to an unrealistic level considering the extended period of attractive mortgage rates.

How Does the Indiana Housing Market Fare with This Reasoning?

In terms of employment, Indiana is experiencing very positive trends. According to the Indiana Business Research Center and the Center for Econometric Model Research, Indiana’s employment growth will continue at a pace of 43,000 jobs per year through 2018. In addition, unemployment is expected to decline during this period and Hoosier personal income will rise faster than the nation (see Figure 1).

Figure 1: Indiana Employment and Unemployment Rate Forecast, 2014 Q1 to 2018 Q4

graph

Source: Indiana University Center for Econometric Model Research and Indiana Business Research Center (released in June 2015)

In terms of existing home sales, Indiana beat the nation by 3 percentage points for the 12 months ending June 2015. In contrast, during this same period, Indiana lagged the nation in home price appreciation by 3.3 percentage points and in residential building permits by 13.2 percentage points (see Table 2). Considering these results together, they are probably the consequence of Indiana having a larger supply of existing inventory carrying over from the downturn—a positive for Hoosier homebuyers compared to others around the country that were facing a shortage of inventory.

Table 2: Mid-Year Comparison of Indiana and U.S. Housing Markets

U.S. Indiana
Existing Home Sales, July 2014 to June 2015, Year-over-Year Change 3.2% 6.2%
House Price Appreciation, 2014 Q1 to 2015 Q1 5.8% 3.5%
Residential Building Permits, July 2014 to June 2015, Year-over-Year Change 10.3% -2.9%
Foreclosure Rate, 2015 Q2 2.1% 2.3%
Housing Affordability Index, 2014* 164 239

* The housing affordability index measures the ability of a family earning the median income to purchase a median-priced home. Higher index values indicate increased affordability. The value shown for Indiana is for the Indianapolis metro.
Source: IBRC, using data from the Indiana Association of Realtors, National Association of Realtors, Federal Housing Finance Agency, U.S. Census Bureau, Mortgage Bankers Association and CoreLogic

According to the Indiana Association of Realtors, Indiana’s year-to-date 2015 closed sales is trending higher than 2014, while its median sales price increased 5.9 percent to $134,000 (see Table 3).

Table 3: Indiana Housing Overview

September 2014 September 2015 Percent Change Year-to-Date 2014 Year-to-Date 2015 Percent Change
Closed Sales 6,958 7,282 4.7% 56,752 61,509 8.4%
Median Sales Price $128,000 $132,500 3.5% $126,500 $134,000 5.9%

Source: Indiana Association of Realtors

When looking at housing costs, Indiana typically has stable housing values. That is, Indiana homeowners usually experience small swings in value as economic conditions and world events take hold year to year.

While Indiana trailed the country in home price appreciation over the past year, as seen in Table 2, its housing affordability remains attractive, with an affordability index value of 239 for the Indianapolis metro area, as interest rates remain low.

Considering the ratio of sales price to income has remained stable (see Figure 2), it follows that Indiana generally provides a stable job base and a good wage relative to housing costs.

Figure 2: Ratio of Median Sales Price to Median Household Income, U.S. and Select Metro Areas

graph

Source: Joint Center for Housing Studies at Harvard University, using data from Moody’s Data Buffet®

If Indiana’s economy continues its positive run through 2016, with more jobs and better wages, it will mean positive results for the housing market. On the other hand, if job growth slows, wages stagnate or interest rates rise more than expected, Hoosiers will still fare well compared to less stable parts of the country.

Summary

Overall, the 2016 single-family housing market is looking positive for Indiana and the country. Job growth is improving and other economic fundamentals are positive. Thus, consumer confidence should be high. 2016 should see the single-family housing market remain strong for both Indiana and the nation.