Fitch: 2016 U.S. Home Prices ‘More Sustainable’

Fitch Ratings, New York, said U.S. home prices should grow by 4.5 percent in 2016, a level it said appears to be “more sustainable” than a decade ago.  

Fitch said nominal prices should approach levels reached during the 2006 housing bubble. U.S. growth will likely outpace that of Canada, where Fitch forecasts a 2.5 percent increase in home prices.  

“U.S. prices appear more sustainable than a decade ago,” said Fitch Managing Director Grant Bailey. “Since then, the country’s population has increased by over 20 million people and total gross income is up by roughly 25 percent in nominal terms. When adjusted for inflation, U.S. home prices remain more than 20 percent below their 2006 peak levels. And new home construction in the U.S. is rebounding from its post-crisis lows but remains below long-term historical averages.”  

The report cautioned, however, that some regional U.S. markets appear to be “overvalued.” Fitch said California and Texas could experience softening in their housing markets, though large downturns are unlikely. The fall in commodities prices could also put further downward pressure on Texas home prices. California’s home price growth has eroded affordability, which has declined 25 percent since 2011.  

Fitch said U.S. mortgage rates are expected to rise between 25 and 50 basis points by year end, “which should not affect existing borrower performance in a mostly fixed-rate market but will encourage lenders to broaden loan eligibility requirements as refinance volumes dry up.”  

Unlike the U.S., Fitch said Canada’s national prices are overvalued by more than 20 percent compared to long-term economic fundamentals, leaving Canadian home prices exposed to more downside risk.  

“In 2016, Canadian affordability will continue to be pressured as prices rise, albeit modestly,” Bailey said. “Should Canadian interest rates rise in concert with U.S. policy tightening, wage growth will be insufficient to prevent the Canadian market from cooling. Yet, the lack of risky mortgage products and high average borrower equity should mute the impact of an increased debt burden on performance.”