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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 2017

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

In 2017, housing supply and pricing will be the key drivers, while demand for single-family housing will remain strong—mirroring 2016. Positive job gains and attractive interest rates continue to bring buyers to the market. Consumer confidence will improve as employment growth remains positive, interest rates stay attractive, and consumers continue to improve their balance sheets.

On the other hand, supply is struggling to keep up with demand as builders struggle to come back to the market. Moreover, the foreclosure inventory has evaporated and the excess of available existing homes is gone. Coupling these realities with low interest rates is resulting in pricing growth that outpaces inflation. In particular submarkets, with very strong demand characteristics and constrained supply, it is likely that unsustainable pricing exists. In summary, the 2017 housing market will be strong, but buyers should beware of potential pricing “bubbles” resulting from an imbalance between supply and demand.

For example, the National Association of Realtors forecasts that existing home sales will increase 1.6 percent from 2016 levels, while new single-family home sales will increase 9.8 percent nationally. These increases compound the corresponding 2015 and 2016 existing-home sales and new-home sales increases (see Table 1). Housing starts are projected to increase 6.5 percent, with single-family units increasing by 9.1 percent and multifamily units increasing by 1.5 percent. Median home prices for both existing and new homes are expected to increase 3.7 percent and 2.7 percent, respectively. The S&P CoreLogic Case-Shiller Index reported a 5.3 percent annual gain in home prices in August. Portland, Seattle and Denver led the way with the highest pricing gains at 11.7 percent, 11.4 percent and 8.8 percent, respectively. Consumer prices are expected to increase 2.3 percent in 2017, up from 1.2 percent in 2016.

Table 1: National housing outlook

History Forecast
2014 2015 2016 2017
Home sales (thousands)
Existing home sales 4,940 5,284 5,358 5,443
New single-family sales 439 527 570 626
Home sales (% change –­ year ago)
Existing home sales -2.9% 7.0% 2.1% 1.6%
New single-family sales 2.3% 20.1% 13.8% 9.8%
Median home prices ($ thousands)
Existing home sales $197.1 $207.3 $231.0 $238.5
New single-family sales $268.9 $277.0 $304.0 $312.1
Median home prices (% change – year ago)
Existing home sales 5.7% 5.8% 3.9% 3.7%
New single-family sales 5.2% 2.2% 2.6% 2.7%
Additional measures
Housing starts (% change – year ago) 8.5% 10.8% 6.4% 6.5%
Housing affordability index* 164 162 165 156

* 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 2016”

Considering these numbers, one can see the strong demand outpacing starts and the resulting increase in pricing outpacing inflation. Also, one can reason the need for supply to catch up with demand to provide a more reasonable pace of home price increases. The high price increases of Portland, Seattle and Denver show the impact of these dynamics on particular markets that have very strong demand drivers (primarily positive job growth) and weak supply drivers (mainly available land). In these markets, it is likely prices are being driven to unsustainable levels considering the availability of low interest rates. In short, it is important for the housing market’s price stability that housing supply catch up with demand.

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 more narrow home affordability.

In 2017, home affordability is expected to slightly decrease across the country. The National Association of Realtors projects a change in this index from 165 to 156 from 2016 to 2017. Considering a positive outlook for employment and continued attractive interest rates, this relatively minor reduction in affordability should have little impact nationally.

How will the Indiana housing market fare in 2017?

In terms of employment, Indiana is experiencing very positive trends. According to the Current Employment Statistics data from the U.S. Bureau of Labor Statistics, Indiana added 44,300 jobs between September 2015 and September 2016. And according to the Indiana Business Research Center and the IU Center for Econometric Model Research, Indiana’s employment growth will continue at a pace of about 30,000 jobs per year through 2019 (see Figure 1). In addition, unemployment is expected to decline during this period and the personal income of Hoosiers will rise at a faster rate than the nation.

Figure 1: Indiana employment and unemployment rate quarterly forecast

graph

Source: Indiana University Center for Econometric Model Research and Indiana Business Research Center (released in September 2016)

In terms of existing home sales, Indiana beat the nation by 1.6 percentage points for the 12 months ending June 2016. In residential building permits, Indiana outpaced the nation by 4.3 percentage points. In contrast, Indiana lagged the nation by 0.8 percent in home price appreciation at the end of the first quarter. While Indiana’s months supply of inventory generally mirrors the nation, its rental vacancy rate surpasses the nations’ by 3.3 percentage points (see Table 2). Considering these results together, Indiana is doing a good job of adding new single-family homes and multifamily apartments relative to the nation—a positive for Hoosier homebuyers and renters compared to others around the country that are facing a shortage of inventory.

Table 2: Mid-year comparison of Indiana and U.S. housing markets

  U.S. Indiana
Existing home sales, July 2015 to June 2016, year-over-year change 5.1% 6.7%
House price appreciation, 2015 Q1 to 2016 Q1 5.5% 4.7%
Residential building permits, July 2015 to June 2016, year-over-year change 3.1% 7.4%
Foreclosure rate, 2016 Q2 1.6% 1.8%
Months supply of inventory, June 2016  4.6 4.9
Rental vacancy rate, 2016 Q2 6.7% 10.0%
Housing affordability index, 2015* 164 280

* 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 an average of the available metros .
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 2016 closed sales are trending higher than 2015, while its median sale price increased 4.4 percent to $139,900 year to date (see Table 3).

Table 3: Indiana housing overview

Sep 2015 Sep 2016 Percent change Year-to-date 2015 Year-to-date 2016 Percent change
Closed sales 7,282 7,736 6.2% 61,509 66,068 7.4%
Median sales price 132,500 142,900 7.8% 134,000 139,900 4.4%

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 unfold each year.

While Indiana trailed the country in home price appreciation over the past year, as seen in Table 2, its foreclosure rate generally kept pace with the nation at 1.8 percent. Perhaps most importantly, Indiana’s housing affordability remains very attractive, with an affordability index ranging from 245 in Indianapolis to around 297 in Fort Wayne and South Bend, as interest rates remain low.

Considering that the ratio of sales price to income has remained stable (see Figure 2), it follows that, year to year, 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

graph

Source: IBRC, using data from the Indiana Association of Realtors, the National Association of Realtors and the U.S. Census Bureau

If Indiana’s economy continues its positive run through 2017, with more jobs and better wages, it will mean positive results for the housing market. Moreover, the threat of unsustainable home prices in Indiana is lower, as Hoosier developers are doing a good job of adding supply to the 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 2017 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. 2017 should see the single-family housing market remain strong for both Indiana and the nation.