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Navigating the New Normal

2016 Real Estate Outlook

Summary:

Nearly every respected economist is furiously searching for a more sophisticated and exciting way to describe their 2016 prediction than simply stating “just another normal year ahead.” Unlike the previous eight years since the 2008 recession, when there was something exciting to write about each year, the upcoming year’s economic outlook is expected to be relatively boring. Lucky for us housing industry junkies, when it gets boring... that’s when it generally gets really “good” for real estate.

Across multiple generations the purity of the American Dream has never been in question. The “dream” is simple and tends to work exactly how it is designed: the ability to buy a home at fair market value, obtain mortgage financing, watch it steadily grow in value alongside organic economic expansion allowing for moderate equity growth, selling it with structural tax advantages and then using the proceeds to upsize or downsize to another property—all the while creating long-lasting memories in a place we all love to call “home.” A normal, stable, boring economy lies at the very foundation of that dream because the housing sector tends to like the “normal” economic heartbeat.

1. Healthy Demand Drives

We believe that studying aggregate demand is the key to tracking various structural changes in our ecosystem. In addition to traditional market demand for housing, we predict there are going to be five market forces and demand signals at play in real estate in the year to come:

Millennials: We expect Millennials to represent the largest share of homebuyers beginning in 2016 and continuing for many years to come

Boomers: The number of boomers looking at retirement is going to drive transaction volume

Boomerang Buyers: Distressed sellers who sat out the mandatory period may now have a second shot at being buyers

Renters: Renters will actively seek to buy given the increase in rental costs and changing rate environment

The Emerging Lifestyle Homebuyer: We are predicting a new trend with internet entrepreneurs and remote workers who are choosing to live where they want to live as opposed to being forced to live near their workplace

We are watching: First-time home buyer velocity and the trend of renters turning into buyers.


2. Balanced Market Inventory


Rebalancing will continue across markets returning to less volatile and more stable inventory levels.

Over the last few years, we have seen erratic inventory levels across signals a buyers market with a general balanced market indicated by markets begin to rebalance and move towards a less volatile state an MSI of 6 (months). New inventory is coming, albeit slowly, but where the ratio between the new supply coming to the market and it is crucial to note that a more balanced market will be smoother organic demand absorbing that supply is returning to historical sailing for everyone with less overall volatility in pricing and averages (often tracked using the month’s supply of inventory or emotions, both for buyers in search of a competitive advantage, and MSI) or sellers who turn around and become buyers themselves.

While macro-markets are starting to show signs of balanced inventory, there are various micro-markets that are still recalibrating and present short-term, tactical opportunities for buyers and sellers based on individual market conditions. However, we project that many of these individual market opportunities will normalize during the course of 2016.

We are watching: Month’s Supply of Inventory (MSI).


3. Return of Pricing Stability


The federal government will continue to watch inflation and economic growth while calibrating the markets with small rate hikes in 2016.

We know that prices track closely to demand drivers and supply dynamics in the individual market. However, with a return to balanced inventory levels combined with healthy demand drivers, we project the return of stability to pricing across the board, and the beginning of moderate (approximately 4-6 percent) annual growth in pricing and values.

We have noticed that it often takes consumer psychology about 18-24 months to accept and align with market rebalancing, and we predict that 2016 will be a more pragmatic year for qualified buyers and realistic sellers to consider fair market value pricing advice. The market has shown and will continue to show little tolerance for unrealistic sellers and bottom-fishing buyers.

We are watching: Sales price to list price ratios; days on market; and transaction velocity.


 

4. Predictable interest rate landscape

After seven years of close to zero interest rate guidance, and continuing the streak of nine years without a rate hike, 2015 has been a year that shall be conveniently forgotten forever in the annals of history for being extremely ordinary. We predict that the federal government will watch inflation, growth, and the market’s reaction to the first few tiny rate hikes in 2016 while it continues to plan its future raises based on these same economic factors.

While we project two small interest rate hikes a year for each of the next two years, the Fed’s over-communication related to its views on how it will manage the rate environment provided a platform for it to be softly priced into the market instead of it being a rate shock. We predict that the government will continue to provide comprehensive guidance and communication for the upcoming hikes and we are comforted by the stance that it is taking as a steward of the economy.

However we slice and dice the interest rate landscape, we would like to underscore the fact that we are still in a historically low rate environment with higher rates around the corner, giving consumers an educated opportunity to make sensible decisions in the coming year related to cost of capital.

We are watching: The federal government’s guidance and new mortgage products.



5. Rents Hold Steady

While rapid price escalation has cooled off over the last 24 months, it had been so tremendous from the rebounding markets since 2010 that many buyers were priced out, especially in metropolitan areas and luxury markets, and were forced to rent. This unprecedented demand for rental units in the last four years drove demand and rents extremely high, at a rate greater than the increase in home prices in the same period!

This was especially true in multi-family environments, and we have seen multi-family construction growth at a very rapid pace of 25 percent since 2014 while single family remained around 9 percent. While we project another few years of healthy rental demand due to overall economic expansion, we see rents leveling off and holding steady through 2016 and 2017 due to more multi-family inventory coming to the market, stability in single family pricing, and increasing household formations that could drive more traditional homebuyer activity.

We are watching: Housing starts and rental vacancy rates.


6. Geopolitical Wildcards

There are three major geopolitical topics that will undoubtedly have an impact on the world economy in aggregate with a likely probability that they could all have a direct or indirect impact on the housing sector:

• Worldwide Elections: Over a dozen important elections are being held at key countries around the world in 2016

• U.S. Elections & Candidate Views: With candidates speaking out on certain issues, the housing market could react depending on the tenor of the comments

• International Crises & Terrorism: ISIS, Syria’s Civil War, sanctions on Russia, and a decelerating Chinese economy are a few that contribute to global risk

As the interconnectedness of world economies continues to grow,
the geopolitical issues across the world will strangely seem to have
a tangential impact on the value of our housing stock. However, as residents of the United States, we are more fortunate than most citizens of the world as we enjoy the benefits of various freedoms and a free market economy which is arguably the most efficient in the world. We will continue to see strong international demand for U.S. real estate, especially in metropolitan areas and luxury markets, as the move to America is more and more viewed as a “flight to quality.”

We are watching: Worldwide and U.S. Elections, candidate views and international geopolitical issues.