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This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
December 05, 2016
Economics Group
Rising Mortgage Rates Are the Latest Challenge for Housing The financial markets have responded positively to president-elect Donald Trump’s surprising victory. Stock prices have rallied higher on expectations that tax cuts, increased infrastructure spending and reduced regulation will boost long-term economic growth. Interest rates have also risen, however, as investors are now anticipating slightly higher inflation, larger budget deficits and, with a stronger-than-previously expected economic outlook, higher opportunity costs. The higher interest rate environment that we now expect likely will create challenges for the still-slowly recovering housing market. Housing affordability, while near historic highs, has been falling as home prices have risen much faster than incomes in recent years. The sudden rise in conventional mortgage rates will reduce affordability further in coming months. Moreover, the abrupt strengthening in the dollar, particularly since the presidential election, will further reduce sales to international buyers, which had already slowed considerably in many East Coast markets.
The most recent housing data remain encouraging. The big surprise this past month was the huge 25.5 percent surge in October housing starts, which showed single-family starts rising 10.7 percent and multi-family starts surging 68.8 percent (Figure 2). We believe than much of October’s outsized gain results from milder-than-usual weather, which has allowed more construction to begin. Starts are now running well ahead of permits, which are less influenced by weather distortions. Within starts, we detect a subtle shift toward less expensive homes. Builders, particularly in the South, are focusing more intently on homes priced at or below the median new home sales price, which is currently near a historic premium relative to existing homes.
Builders remain fairly optimistic, particularly in the West and South, where sales remain strong and inventories are low. The new administration may eventually find a way to ease up on historically restrictive mortgage rules. Such a move, however, will take time.
Figure 1
Figure 2
Source: FHLMC, Federal Reserve Board, U.S. Dept. of Commerce and Wells Fargo Securities
0%
1%
2%
3%
4%
5%
6%
7%
0%
1%
2%
3%
4%
5%
6%
7%
04 05 06 07 08 09 10 11 12 13 14 15 16
Mortgage Rate vs. 10-Year Treasury YieldPercent
Conv. 30-Year Fixed Mortg. Rate: Nov-30 @ 4.08%
10-Year Yield: Nov-30 @ 2.34%
0
120
240
360
480
600
0
400
800
1,200
1,600
2,000
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Single & Multifamily Housing StartsSAAR, In Thousands, 3-Month Moving Average
Single-Family Housing Starts: Oct @ 793K (Left Axis)Multifamily Housing Starts: Oct @ 388K (Right Axis)
Special Commentary
Mark Vitner, Senior Economist mark.vitner@wellsfargo.com ● (704) 410-3277
Misa Batcheller, Economic Analyst misa.n.batcheller@wellsfargo.com ● (704) 410-3060
2017 U.S. Housing Market Outlook
The most recent housing data remain encouraging.
Housing affordability has been falling as home prices have risen much faster than incomes.
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
2
A Slightly More Upbeat Housing Forecast October’s strong pickup in housing starts caused us to slightly boost our 2016 housing starts forecast and we have also taken the 2017 and 2018 numbers higher. We look for housing starts to average a 1.17 million unit pace in 2017 and a 1.22 million unit pace in 2018 (Figure 3). The more upbeat outlook mostly reflects base effects, however, as well as a shift toward lower-priced homebuilding. As a result, our residential construction spending forecast has been less impacted.
Our cautious forecast is largely due to the faster rise in long-term interest rates, which has taken place since the presidential election, and slightly higher interest rate environment that we expect over the next couple of years. The return to a more normal interest rate outlook is particularly perplexing to the housing sector because we are starting from such unusually low levels. A 50 basis point rise in conventional mortgage rates, coupled with a 4 percent rise in home prices, pushed the monthly principal and interest payments up roughly 10.5 percent on the median priced existing home. That increase is quite a lot for households to absorb, as they are are seeing wages and salaries rise about 4.5 percent a year. If interest rates were higher, buyers could avoid much of the immediate hit from rising rates by shifting to an adjustable rate loan. Such a strategy yields little savings at today’s still-low rate and is not the route many would likely take when they expect interest rates to rise. Shifting to less expensive homes is also a less viable option in this market because inventories of both new and existing homes are so low.
With 10 months of data in the books, we have a good idea on how home sales and new home construction will finish in 2016. Building activity tends to slow during the winter months, although November’s mild weather may have allowed more activity to occur and buyers may have moved ahead of interest rate hikes. The recent spike in mortgage rates has already caused refinancing activity to fall off sharply and will likely impact sales in coming months. We do not look for a repeat of the taper tantrum in 2015, when an even more abrupt and sharper rise in mortgage rates led to a surge in sales cancelations that set back the housing recovery.
The end of the ultra-low interest rates era has pushed the value of the dollar higher against the currencies of many key U.S. trading partners, making it more costly for foreign buyers to purchase homes in the United States (Figure 4). The pullback of foreign buyers was already apparent in New York City and Miami but is likely to become increasingly evident along the West Coast and parts of the South, where foreign buying has pushed prices higher than the underlying fundamentals would justify. When coupled with increased construction, we expect home price appreciation to moderate, with the S&P CoreLogic Case-Shiller 10-City index rising 4.4 percent next year, after rising an estimated 4.5 percent in 2016. The median price of a new home is expected to decelerate even more dramatically, with prices climbing an estimated 3.6 percent this year and 3.2 percent in 2017. The moderation in new home prices largely results from the changing mix of construction, with building activity shifting to less costly suburban locations.
Figure 3
Figure 4
Source: U.S. Department of Commerce, Bloomberg LP and Wells Fargo Securities
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
2.4
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
2.4
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Thousands
Housing StartsMillions of Units
Multifamily Starts
Multifamily Forecast
Single-Family Starts
Single-Family Forecast
Forecast
0.7%
-0.9%
22.3%
-12.3%
7.3%
19.7%
1.2%
-30% -20% -10% 0% 10% 20% 30% 40%
South Korea
Germany
U.K.
Japan
China
Mexico
Canada
U.S. Dollar Appreciation vs. Top Export DestinationsTop 7 Trading Partners, Year-over-Year Percent Change
Nov-16
U.S.
Exports
Less
More
The recent spike in mortgage rates has already caused refinancing activity to fall off sharply.
We look for housing starts to average a 1.17 million unit pace in 2017 and a 1.22 million unit pace in 2018.
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
3
2010
2011
2012
2013
2014
2015
2016
2017
2018
Real GDP,
Perc
ent
Change
2.5
1.6
2.2
1.7
2.4
2.6
1.5
2.1
2.1
Resid
ential In
vestm
ent,
Perc
ent
Change
-2.5
0.5
13.5
11.9
3.5
11.7
4.8
3.8
4.8
Nonfa
rm E
mplo
ym
ent,
Perc
ent
Change
-0.7
1.2
1.7
1.6
1.9
2.1
1.7
1.4
1.2
Unem
plo
ym
ent
Rate
9.6
8.9
8.1
7.4
6.2
5.3
4.9
4.7
4.5
Hom
e C
onstr
uction
Tota
l Housin
g S
tart
s,
in T
housands
586.9
608.8
780.6
924.9
1,0
03.3
1,1
11.8
1,1
70.0
1,2
15.0
1,2
50.0
Sin
gle
-Fam
ily S
tart
s,
in T
housands
471.1
430.5
535.3
617.7
647.9
714.5
780.0
830.0
870.0
Multifam
ily S
tart
s,
in T
housands
115.8
178.3
245.3
307.2
355.4
397.3
390.0
385.0
380.0
Hom
e S
ale
s
New
Hom
e S
ale
s,
Sin
gle
-Fam
ily,
in T
housands
322.0
305.0
369.0
429.0
437.0
501.0
565.0
600.0
630.0
Tota
l Exis
ting H
om
e S
ale
s,
in T
housands
4,1
90.0
4,2
60.0
4,6
60.0
5,0
90.0
4,9
40.0
5,2
50.0
5,4
10.0
5,5
40.0
5,6
50.0
Exis
ting S
ingle
-Fam
ily H
om
e S
ale
s,
in T
housands
3,7
08.0
3,7
87.0
4,1
28.0
4,4
84.0
4,3
44.0
4,6
46.0
4,7
95.0
4,9
15.0
5,0
20.0
Exis
ting C
ondom
iniu
m &
Tow
nhouse S
ale
s,
in T
housands
474.0
477.0
528.0
603.0
591.0
608.0
615.0
625.0
630.0
Hom
e P
rices
Media
n N
ew
Hom
e,
$ T
housands
221.8
227.2
245.2
268.9
282.8
296.4
307.0
316.8
326.2
Perc
ent
Change
2.4
2.4
7.9
9.7
5.2
4.8
3.6
3.2
3.0
Media
n E
xis
ting H
om
e,
$ T
housands
172.9
166.1
176.8
197.1
208.3
222.4
233.1
243.2
252.6
Perc
ent
Change
0.2
-3.9
6.4
11.5
5.7
6.8
4.8
4.3
3.9
FHFA P
urc
hase O
nly
Index,
Perc
ent
Change
-3.0
-4.1
3.1
7.3
5.4
5.6
5.5
4.6
4.2
S&P C
ase-Shiller
C-10 H
om
e P
rice I
ndex,
Perc
ent
Change
2.1
-3.5
0.3
11.7
7.9
4.6
4.5
4.4
4.2
Inte
rest
Rate
s -
Annual Avera
ges
Federa
l Funds T
arg
et
Rate
0.2
50.2
50.2
50.2
50.2
50.2
70.5
61.0
01.5
0
Prim
e R
ate
3.2
53.2
53.2
53.2
53.2
53.2
73.5
64.0
04.5
0
Ten-Year
Tre
asury
Note
3.2
22.7
81.8
02.3
52.5
42.1
41.7
92.3
72.5
6
Conventional 30-Year
Fix
ed R
ate
, Com
mitm
ent
Rate
4.6
94.4
63.6
63.9
84.1
73.8
53.7
34.2
94.4
4
One-Year
ARM
, Eff
ective R
ate
, Com
mitm
ent
Rate
3.7
93.0
32.6
92.6
12.4
42.5
32.7
02.9
03.0
0
Fore
cast
as o
f: D
ecem
ber
5,
2016
Sourc
e:
U.S
. D
ept.
of
Com
merc
e,
U.S
. D
ept.
of
Labor,
FR
B,
FH
FA
, FH
LM
C,
National A
ssocia
tion o
f R
ealtors
, S
&P,
Wells F
arg
o S
ecuri
ties
Na
tio
na
l H
ou
sin
g O
utl
oo
k
Forecast
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
4
Mortgages
Long-term mortgage rates have continued to march higher in the aftermath the U.S. election. According to Freddie Mac, the average 30-year fixed mortgage rate has risen roughly half a percentage point since the election to 4.08 percent during the week ended Nov. 30, marking the highest rate since July 2015.
Mortgage purchase applications also spiked during the week following the election, rising 18.8 percent as the threat of even higher rates likely encouraged some potential homebuyers to lock in a mortgage. However, mortgage applications for refinancing, which are more highly sensitive to interest rates, continued to falter, reporting an eighth consecutive decline for the week ended Nov. 25.
Source: Mortgage Bankers Association, FHLMC, Federal
Reserve Board and Wells Fargo Securities
0%
1%
2%
3%
4%
5%
6%
7%
0%
1%
2%
3%
4%
5%
6%
7%
04 05 06 07 08 09 10 11 12 13 14 15 16
Mortgage Rate vs. 10-Year Treasury YieldPercent
Conv. 30-Year Fixed Mortg. Rate: Nov-30 @ 4.08%
10-Year Yield: Nov-30 @ 2.34%
0
2,000
4,000
6,000
8,000
10,000
12,000
0
2,000
4,000
6,000
8,000
10,000
12,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Mortgage Applications for Refinancing4-Week Moving Average, Seasonally Adjusted, Index 1990 =100
Weekly Figure: Nov-25 @ 1,470Down from 1,754 on Nov-184-Week Average: Nov-25 @ 1,7674-Week Average Up 6.1% from Same Period Last Year
0
100
200
300
400
500
0
100
200
300
400
500
92 94 96 98 00 02 04 06 08 10 12 14 16
Mortgage Applications for PurchaseSeasonally Adjusted Index, 1990=100
Weekly Figure: Nov-25 @ 233.6
Down From: Nov-25 @ 234.1
8-Week Average Up 6.7% From Same Period Last Year
Mort. Appl.: 8-Week Average: Nov-25 @ 216.2
60
80
100
120
140
160
180
60
80
100
120
140
160
180
11 12 13 14 15 16
MBA Mortgage Credit Availability IndexIndex, Mar 2012 = 100
MCAI: Oct @ 171.3
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Subprime GSE-eligible
Gov't QM non-jumbo,
non-GSE
QM jumbo Non-QMjumbo
Non-QMnon-jumbo
Mortgage Supply and DemandQ4 2016, 4-Quarter Mov. Avg.
Net Percent of Banks Tightening Standards
Net Percent of Banks Reporting Stronger Demand
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
5
Single-Family Construction
Single-family housing starts started off the fourth quarter on a solid footing, rising 10.7 percent in October. The reported strength in single-family construction coincides with generally positive home builder sentiment. The NAHB/Wells Fargo Housing Market Index has averaged more than 60 over the past six months and builders report strong demand across much of the country.
While stronger housing starts are encouraging, starts are now running well ahead of permits. Milder weather may have boosted starts in recent months. On a three-month moving average basis, single-family housing permits are roughly 6 percent below starts, suggesting some payback in starts in the coming months.
Source: U.S. Department of Commerce, National Association of Home Builders and Wells Fargo Securities
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0
10
20
30
40
50
60
70
80
90
100
90 92 94 96 98 00 02 04 06 08 10 12 14 16
Builder Confidence & Single-Family StartsDiffusion Index; Starts SAAR 3-MMA in Millions
NAHB Housing Market Index: Nov @ 63.0 (Left Axis)Single-Family Housing Starts: Oct @ 793K (Right Axis)
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Single-Family Housing Completions Seasonally Adjusted Annual Rate, In Millions
Single-Family Housing Completions: Oct @ 749K
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
90 92 94 96 98 00 02 04 06 08 10 12 14 16
Thousands
Single-Family Housing Starts vs. Building Permits SAAR, In Millions, 3-Month Moving Average
Single-Family Housing Starts: Oct @ 793K
Single-Family Building Permits: Oct @ 747K
0 5 10 15 20 25 30 35
Los Angeles, CA
Seattle, WA
Raleigh, NC
New York, NY-NJ-PA
Denver, CO
Tampa, FL
Nashville, TN
Washington, DC-VA-MD-WV
Charlotte, NC-SC
Austin, TX
Orlando, FL
Phoenix, AZ
Atlanta, GA
Dallas, TX
Houston, TX
Thousands
Single-Family Housing Permits by MSATotal Number of Permits in Thousands, YTD October 2016, NSA
000
300
600
900
1,200
1,500
1,800
2,100
2,400
000
300
600
900
1,200
1,500
1,800
2,100
2,400
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Single-Family Housing Starts Annual Average of SAAR
SF Housing Starts: 2016 @ 768K 2016 is YTD Average
of SAAR
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
6
Multifamily Construction
Multifamily construction activity picked back up in October, following a sizable decline in September. Apartment completions have exceeded demand for the past six quarters, but the margin has narrowed. Rent increases have also eased somewhat.
The bulk of multifamily building is in the South, which has accounted for more than 40 percent of the nation’s multifamily starts over the past 10 months. Apartment construction has been particularly strong in the Dallas, Atlanta and Miami metropolitan areas.
While multifamily starts appear to have topped out, construction will likely remain solid as permits are running a good bit ahead of starts.
Source: U.S. Dept. of Commerce, Reis, Inc., American Institute of Architects and Wells Fargo Securities
0
100
200
300
400
500
600
0
100
200
300
400
500
600
90 92 94 96 98 00 02 04 06 08 10 12 14 16
Multifamily Housing Starts vs. Building Permits SAAR, In Thousands, 3-Month Moving Average
Multifamily Housing Starts: Oct @ 388K
Multifamily Building Permits: Oct @ 455K
0
20
40
60
80
100
0
100
200
300
400
500
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Multifamily Housing StartsSAAR, In Thousands, 3-Month Moving Average
5+ Units: Oct @ 374K (Left Axis)
2-4 Units: Oct @ 14K (Right Axis)
0 5 10 15 20 25 30
Boston, MA-NH
San Diego, CA
Austin, TX
San Francisco, CA
Phoenix, AZ
Denver, CO
Houston, TX
Washington, DC-VA-MD-WV
Chicago, IL-IN-WI
Miami, FL
Atlanta, GA
Seattle, WA
Los Angeles, CA
Dallas, TX
New York, NY-NJ-PA
Thousands
Multifamily Housing Permits by MSATotal Number of Permits in Thousands, YTD October 2016, NSA
-75
-50
-25
0
25
50
75
100
2%
3%
4%
5%
6%
7%
8%
9%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Apartment Supply & DemandPercent, Thousands of Units
Apartment Net Completions: Q3 @ 38,010 Units (Right Axis)
Apartment Net Absorption: Q3 @ 37,734 Units (Right Axis)
Apartment Vacancy Rate: Q3 @ 4.4% (Left Axis)
25
30
35
40
45
50
55
60
65
25
30
35
40
45
50
55
60
65
96 98 00 02 04 06 08 10 12 14 16
Residential Architecture Billings 3-Month Moving Average, Seasonally Adjusted
Residential Billings: Oct @ 51.2
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
7
Buying Conditions
Various measures of buying plans suggest that home sales may run into a soft patch. While the proportion of consumers in the University of Michigan’s Consumer Sentiment Survey stating that now is a good time to buy a home inched up in November, it remains well below the highs hit earlier this year. Most of the drop has been due to higher home prices, which have reduced affordability. Now that mortgage rates have risen, we expect the proportion of consumers that believe now is a good time to buy a home to fall a bit further.
Home price appreciation has moderated and starts of more modestly priced new homes have risen in recent months, which should offset some of the drag from rising mortgage rates.
Source: University of Michigan, National Association of Realtors, FHLMC, S&P, Federal Reserve Board, U.S. Dept. of Commerce and Wells Fargo Securities
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%
Jan-16 Mar-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16
Mortgage Rate vs. 10-Year Treasury Yield30-Year Fixed Mortgage Rate, Percent
Conv. 30-Year Fixed Mortg. Rate: Nov-30 @ 4.08% (Left Axis)
10-Year Yield: Nov-30 @ 2.34% (Right Axis)
0
25
50
75
100
125
150
175
200
0
25
50
75
100
125
150
175
200
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Good Time to Buy vs. Good Time to SellUniversity of Michigan Consumer Sentiment Survey
Good Time to Buy a House: Nov @ 149.0Good Time to Sell a House: Nov @ 123.0
2%
4%
6%
8%
10%
12%
14%
10%
13%
16%
19%
22%
25%
28%
90 92 94 96 98 00 02 04 06 08 10 12 14 16
Mortgage Payment vs. Mortgage RatePrincipal & Interest Payment as a Percent of Income
6 Month Moving Average: Sep @ 15.4% (Left Axis)
Mortgage Payment as Percent of Income: Sep @ 14.9% (Left Axis)
30-Yr. Conventional Mortg. Rate: Nov @ 3.77% (Right Axis)
-24%
-18%
-12%
-6%
0%
6%
12%
18%
24%
30%
-24%
-18%
-12%
-6%
0%
6%
12%
18%
24%
30%
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Home Prices vs. Wages and SalariesYear-over-Year Percentage Change
Wage & Salaries (3-MMA): Oct @ 4.4%
S&P/Case-Shiller Composite-20: Sep @ 5.1%
National HPI: Sep @ 5.5%
80
100
120
140
160
180
200
220
80
100
120
140
160
180
200
220
95 97 99 01 03 05 07 09 11 13 15
Housing Affordability IndexNational Association of Realtors, Base = 100
Housing Affordability Index: Sep @ 167.5
6-Month Moving Average: Sep @ 162.6
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
8
New Home Sales
New home sales fell 1.9 percent in October to an annual rate of 563,000 homes. Sales for the prior three months were also revised lower. The slower pace raises concerns as to how consumers will respond to rising mortgage rates, which will further challenge affordability and the ability of potential borrowers to qualify.
A positive trend in the underlying data has been the slight pickup in inventories. The inventory of for-sale homes has risen over the past three months, rising to 248,000 homes in October.
New home sales remain up a solid 12.7 percent for the first 10 months of the year relative to the same period a year ago. We expect new home sales to register a 12.8 percent gain for 2016 as a whole and rise another 6 percent in 2017.
Source: U.S. Department of Commerce, FHLMC and Wells Fargo Securities
0
250
500
750
1,000
1,250
1,500
1,750
3%
4%
5%
6%
7%
8%
9%
10%
93 95 97 99 01 03 05 07 09 11 13 15 17
New Home Sales vs. Mortgage RatesSeasonally Adjusted Annual Rate, In Thousands
Mortgage Rate: Nov @ 3.8% (Left Axis)
New Home Sales: Oct @ 563,000 (Right Axis)
2
4
6
8
10
12
14
2
4
6
8
10
12
14
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Months' Supply of New Homes Seasonally Adjusted
Months' Supply: Oct @ 5.2
100
150
200
250
300
350
400
450
500
550
600
100
150
200
250
300
350
400
450
500
550
600
89 91 93 95 97 99 01 03 05 07 09 11 13 15
Inventory of New Homes for SaleNon-Seasonally Adjusted, In Thousands
Inventory: Oct @ 248,000
0
20
40
60
80
100
120
140
160
180
0
20
40
60
80
100
120
140
160
180
97 99 01 03 05 07 09 11 13 15
New Home SalesNew Homes Sold During Month, Index 2002=100, 3-MMA
South: Oct @ 82.5
Midwest: Oct @ 37.6
West: Oct @ 60.8
Northeast: Oct @ 43.3
$120
$160
$200
$240
$280
$320
$360
$400
$440
$120
$160
$200
$240
$280
$320
$360
$400
$440
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Average and Median New Home Sale PriceIn Thousands
Average Sales Price: Oct @ $354,900
Median New Sales Price: Oct @ $304,500
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
9
Existing Home Sales
Existing home sales rose 2.0 percent in October, following a 2.7 percent gain in September. The 5.60 million unit annual rate marks the strongest pace of existing home sales in nearly a decade. Pending home sales, which reflect purchase contracts, rose in each of the past two months and are up 1.8 percent year over year.
Housing inventory continues to edge lower, falling to 2.02 million homes in October. Inventories are now 4.3 percent below their year-ago level. Low inventories have kept prices firm, with the median price rising nearly 6 percent year-to-year. While affordability challenges continue to dampen sales activity, we expect existing home sales to rise 3 percent in 2016 and rise another 2.4 percent in 2017.
Source: National Association of Realtors, FHFA and Wells Fargo Securities
2.5
3.5
4.5
5.5
6.5
7.5
55
70
85
100
115
130
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Pending vs. Existing Home SalesIndex 2001=100, In Millions, Seasonally Adjusted
Pending Home Sales Index: Oct @ 110.0 (Left Axis)
Existing Home Sales: Oct @ 5.60 Million (Right Axis)
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1.5
2.0
2.5
3.0
3.5
4.0
4.5
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Inventory of Existing Homes for SaleExisting Homes for Sale at End of Month, In Millions
Total Inventory: Oct @ 2.02M
2
4
6
8
10
12
14
16
18
20
2
4
6
8
10
12
14
16
18
20
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Existing Home SupplyIn Months, Seasonally Adjusted
Condo Months' Supply: Oct @ 4.5
Single-Family Months' Supply: Oct @ 4.3
30
50
70
90
110
130
150
30
50
70
90
110
130
150
04 05 06 07 08 09 10 11 12 13 14 15 16 17
Existing Home SalesExisting Homes Sold During Month, Index, 2002=100
Northeast: Oct @ 75.0
Midwest: Oct @ 97.8
South: Oct @ 104.7
West: Oct @ 94.8
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
04 05 06 07 08 09 10 11 12 13 14 15 16
Median Single-Family Existing Home PriceYear-over-Year Percentage Change
Median Price Change: Oct @ 5.9%
6-Month Moving Average: Oct @ 5.2%
FHFA (OFHEO) Purchase Only Index: Aug @ 6.4%
Median Sale Price: Oct @ $233,700
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
10
Home Prices
The S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 0.8 percent in September, pushing the index above its 2006 peak. Adjusted for inflation, however, prices remain about 14 percent below their prior peak.
While national home prices reached a new high in September, home prices in 13 of the 20 metro areas in the 20-City index remain below prerecession levels. House prices in Las Vegas, Phoenix, Miami and Tampa are more than 20 percent below their previous peaks.
The national home price index has risen 5.5 percent over the past year, which, when coupled with the recent pick up in mortgage rates, is adding further to affordability challenges.
Source: NAR, U.S. Dept. of Commerce, U.S. Dept. of Labor, S&P, FHFA and Wells Fargo Securities
34.5%
32.6%
11.8%
6.4%
5.4%
4.9%
4.7%
-2.6%
-7.8%
-8.9%
-8.9%
-9.2%
-13.3%
-13.8%
-14.4%
-18.2%
-21.9%
-22.6%
-28.2%
-34.8%
-9.1%
-7.1%
0.1%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
DenverDallas
PortlandSeattleBoston
CharlotteSan Francisco
AtlantaLos Angeles
ClevelandSan Diego
MinneapolisWashington, D.C.
DetroitNew York City
ChicagoTampaMiami
PhoenixLas Vegas
C-10C-20
National
S&P CoreLogic Case-Shiller Home PricesPercent Change from Previous Peak, NSA
September 2016
11.0%
10.9%
8.7%
8.0%
7.5%
6.7%
6.2%
5.9%
5.8%
5.7%
5.6%
5.3%
5.3%
5.3%
5.3%
4.3%
4.3%
3.0%
2.7%
1.8%
4.3%
5.1%
5.5%
0% 2% 4% 6% 8% 10% 12% 14% 16%
SeattlePortlandDenverDallas
TampaMiami
CharlotteLos Angeles
DetroitSan Francisco
Las VegasSan Diego
AtlantaPhoenix
MinneapolisChicagoBoston
ClevelandWashington, D.C.
New York City
C-10C-20
National HPI
S&P CoreLogic Case-Shiller Home PricesYear-over-Year Percent Change, NSA
September 2016
60
80
100
120
140
160
180
200
60
80
100
120
140
160
180
200
00 02 04 06 08 10 12 14 16
U.S. Real vs. Nominal Home PricesS&P CoreLogic Case-Shiller Home Price Index Jan. 2000=100
Real Home Prices: Sep @ 134.1
U.S. National HPI: Sep @ 184.8
* Real = HPI Deflated w/CPI Less Shelter
$80
$120
$160
$200
$240
$280
$320
$360
$400
$440
$80
$120
$160
$200
$240
$280
$320
$360
$400
$440
89 91 93 95 97 99 01 03 05 07 09 11 13 15
Average and Median New Home Sale PriceIn Thousands
Average Sales Price: Oct @ $354,900
Median New Sales Price: Oct @ $304,500
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
97 99 01 03 05 07 09 11 13 15
Home PricesYear-over-Year Percentage Change
Median Sale Price: Oct @ $233,700Median Sale Price, 3-M Mov Avg: Oct @ 5.7%FHFA Purchase Only Index: Sep @ 6.1%S&P/Case-Shiller Composite-10: Sep @ 4.3%
2017 U.S. Housing Market Outlook WELLS FARGO SECURITIES December 05, 2016 ECONOMICS GROUP
11
Renovation and Remodeling
The Bureau of Economic Analysis’ second estimate for Q3 GDP showed home improvement spending rose at a 2.8 percent annual rate. The stronger Q3 reading coincides with the pickup in retail sales at building material, garden equipment & supply stores. On a year-over-year basis, improvement spending is up a solid 9.5 percent relative to the more modest 3.4 percent gain registered for residential investment excluding improvements.
The outlook for home remodeling activity remains positive, as tight inventory levels of for-sale housing are likely to continue to restrain sales activity. The JCHS Leading Indicator of Remodeling Activity also points to continued strength through 2017.
Source: Joint Center for Housing Studies, U.S. Department
of Commerce, NAHB and Wells Fargo Securities
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
96 98 00 02 04 06 08 10 12 14 16
Residential ImprovementsYear-over-Year Percent Change
Improvements: Q3 @ 9.5%
Res. Investment Ex. Improvements: Q3 @ 3.4%
10
15
20
25
30
35
40
45
50
55
60
65
10
15
20
25
30
35
40
45
50
55
60
65
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
NAHB Remodeling Market IndexIndex, Seasonally Adjusted
Overall Index: Q3 @ 56.8Future Expectations: Q3 @ 57.5Backlog of Remodeling Jobs: Q3 @ 57.8
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
$1,100
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
$1,100
92 94 96 98 00 02 04 06 08 10 12 14 16
Residential Investment Billions of Dollars
Other: Q3 @ $9.6 BBrokers' Commissions: Q3 @ $156.6 BImprovements: Q3 @ $224.1 BNew Building: Q3 @ $298.7 B
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
04 05 06 07 08 09 10 11 12 13 14 15 16 17
Building Material, Garden Equip & Supply Stores3-Month Moving Average
Year-over-Year Percent Change: Oct @ 5.4%
3-Month Annual Rate: Oct @ 8.4%
$100
$150
$200
$250
$300
$350
$100
$150
$200
$250
$300
$350
05 06 07 08 09 10 11 12 13 14 15 16 17
Leading Indicator of Remodeling ActivityIn Billions, 4-Q Moving Total, Harvard Joint Center for Housing Studies
JCHSForecast
Wells Fargo Securities Economics Group
Diane Schumaker-Krieg Global Head of Research, Economics & Strategy
(704) 410-1801 (212) 214-5070
diane.schumaker@wellsfargo.com
John E. Silvia, Ph.D. Chief Economist (704) 410-3275 john.silvia@wellsfargo.com
Mark Vitner Senior Economist (704) 410-3277 mark.vitner@wellsfargo.com
Jay H. Bryson, Ph.D. Global Economist (704) 410-3274 jay.bryson@wellsfargo.com
Sam Bullard Senior Economist (704) 410-3280 sam.bullard@wellsfargo.com
Nick Bennenbroek Currency Strategist (212) 214-5636 nicholas.bennenbroek@wellsfargo.com
Anika R. Khan Senior Economist (212) 214-8543 anika.khan@wellsfargo.com
Eugenio J. Alemán, Ph.D. Senior Economist (704) 410-3273 eugenio.j.aleman@wellsfargo.com
Azhar Iqbal Econometrician (704) 410-3270 azhar.iqbal@wellsfargo.com
Tim Quinlan Senior Economist (704) 410-3283 tim.quinlan@wellsfargo.com
Eric Viloria, CFA Currency Strategist (212) 214-5637 eric.viloria@wellsfargo.com
Sarah House Economist (704) 410-3282 sarah.house@wellsfargo.com
Michael A. Brown Economist (704) 410-3278 michael.a.brown@wellsfargo.com
Jamie Feik Economist (704) 410-3291 jamie.feik@wellsfargo.com
Erik Nelson Currency Analyst (212) 214-5652 erik.f.nelson@wellsfargo.com
Misa Batcheller Economic Analyst (704) 410-3060 misa.n.batcheller@wellsfargo.com
Michael Pugliese Economic Analyst (704) 410-3156 michael.d.pugliese@wellsfargo.com
Julianne Causey Economic Analyst (704) 410-3281 julianne.causey@wellsfargo.com
E. Harry Pershing Economic Analyst (704) 410-3034 edward.h.pershing@wellsfargo.com
Donna LaFleur Executive Assistant (704) 410-3279 donna.lafleur@wellsfargo.com
Dawne Howes Administrative Assistant (704) 410-3272 dawne.howes@wellsfargo.com
Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2016 Wells Fargo Securities, LLC.
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For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.
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