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Happier New Year?

In an end of the year forecast, CoreLogic’s deputy chief economist came rang in a happy new year for the housing economy.

Home sales will increase by 9 percent in 2015, housing starts are expected to grow 14 percent and home price growth is expected to moderate, predicted CoreLogic’s Sam Khater.

“The lower-end home price category is growing faster than the higher-end price category in the top 25 U.S. markets, reflecting tight supply and lack of new construction.

“Perhaps the most important economic trend though, is that employment growth for millennials began to markedly improve in 2014. Most notably, the 25 – 29 year-old segment experienced a 3.0 percent improvement in employment growth, which is one percentage point higher than the overall employment growth rate. While part of the improvement is the demographic transition of Millennials as they age, it is still very good news, because this age cohort is the key first-time homebuyer segment. Moreover, younger households exhibit more mobility and higher marginal tendencies to consume from income, so stronger employment growth should manifest itself in higher spending.

Khater said the improving economic backdrop helped the housing market withstand the modestly higher-rate environment in the early part of 2014, especially given continued rapid home price appreciation. In December, mortgage rates dipped below 3.9 percent for the first time since May 2013, when rates spiked and led to a slowdown in sales in the second half of 2013 and first half of 2014. While rates are still very low, home prices are not. It is clear that the low-rate environment has benefited home prices, as price-to-income and price-to-rent ratios are high. This indicates home price growth going forward will be fairly muted.

“Looking ahead to 2015, stronger economic fundamentals mean demand for housing is expected to increase, with overall sales projected to increase to 5.8 million in 2015, up 9 percent from 5.3 million in 2014. Total housing starts are expected to reach 1.1 million in 2015, a 14 percent year-over-year increase. This upsurge is healthy, but it’s still 23 percent below the 1.45 million average seen over the last 50+ years. The 30-year fixed mortgage rate is only expected to rise to 4.3 percent, up from 4.2 percent in 2014. Mortgage rates should not increase much, as inflation is low, with minimal upside risk given the deceleration in home price growth and drop in oil prices, the two largest segments of consumer inflation.

While there has been much discussion about opening the credit box, it’s been just that – all talk. Analyzing the most recent data on the three main drivers of underwriting (debt-to-income ratio, loan-to-value ratio and credit scores) reveals that purchase underwriting remains modestly tight and is not loosening yet. While there has been clarification on GSE loan put-backs and new low down payment products, the impact of both will be fairly modest because the weak originations market reflects not just a modestly tight supply of credit, but very weak demand, he said.

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