Is a More Volatile Housing Market Ahead in 2016?

Various projections for home price performance in 2016 have offered mixed messages for how the housing market will shake-out this year. Whereas some forecasts predict continued gains in the range of 5-6%, others expect a more volatile year for housing in 2016.

Looking ahead, year-over-year home price appreciation is projected to be in the range of 1-3% by January 2017, according to the latest Clear Capital Home Data Index (HDI). Historically, this range has represented a “stable” housing market, however, it is substantially lower than the 5.1% growth rate during 2015 and the 6.6% rate in 2014. This, according to Clear Capital, demonstrates “continued market instability and a trend of decreasing rates.”

“While we would love to sugarcoat the HDI data and declare that 2016 merely will be a normalization of the housing market to historical averages not seen since the late 1990s, several factors indicate that it could be another volatile year leading to ongoing uncertainty about the future of American housing,” writes Clear Capital in its January HDI release.

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Overall national price growth will be positive throughout 2016, though the HDI forecast is predicting an average of only 0.4% quarter-over-quarter growth for each quarter during the year. Compared to previous years, this growth forecast is lackluster, when home prices increased by an average of 1.5% quarterly from january 2014 to January 2016.

At the regional level, Clear Capital expects the Northeast, South and Midwest regions to experience positive, but relatively slow gains. At an average rate of 0.6% quarterly growth (2.5% annual), the Midwest is projected to be the fastest-growing region, while the South follows closely behind at 0.5% quarterly growth (2% annual).

The Northeast, on the other hand, lags behind with a projected average increase of 0.1% on a quarterly basis (0.4% annual) throughout 2016.

As for the West (1% quarterly/1.2% annually), which has largely outpaced the rest of the U.S. in terms of growth in recent years, the region is beginning to see market slowdowns across some of its major metropolitan statistical areas (MSAs).

For example, Clear Capital notes recent slowdowns in the latter half of 2015 for markets like San Francisco, Los Angeles and San Diego, which are all seeing quarterly growth rates under 1%.

Meanwhile, other cities like San Jose and Denver are now hovering around 1.3% and 1.5% quarter-over-quarter respectively. Denver is also the metro with the highest projected price growth in 2016, where home prices are forecasted to grow 7.7% during the course of the year, compared to the 11.7% annual growth seen in 2015.

“The market continues to move forward, yet the bumps of volatility still remain,” said Alex Villacorta, Ph.D, Clear Capital’s vice president of research and analytics. “In particular, the combined forces of increased mortgage rates, volatility in the equity markets, and the unfolding effects of TRID are likely to give consumers pause in taking an active role in housing in 2016.”

While there has been a lot of chatter about the impact of the Federal Reserve’s rate hike and its effects on housing, Villacorta suggests the psychological effects of the recent rate hike could have a more negative consequence in some markets than the actual rate hike itself, as buyers begin to question the decision to invest in the housing market.

“This, coupled with the fact that several of the fastest-growing MSAs have already begun to slow down or stagnate even before the rate increased occurred, could spell trouble for the national housing market as a whole if overseas investors begin to look elsewhere for money-parking strategies,” he said.

There are, however, still attractive investment opportunities in the lowest tier of the housing market, Villacort adds, as long as the potential home buyers of this market segment are not forced out due to increasing borrowing costs.

“The long-term effects of some recent housing industry shake-ups are still out, but the models have reacted in a pessimistic way,” said Villacorta. “With the nation projected to grow at a snail’s pace in some regions while virtually standing still in others, our models are taking into account the effects of the interest rate increase by the Fed in December 2015.”

While the real estate market is typically “cold” in January, Villacorta says it is difficult to tell if the effects of market changes have been realized just yet.

“Until the market gets a chance to really heat up again—or not—in the spring, our models are staying consistent and forecasting a significant drop in growth for 2016.”

Written by Jason Oliva

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