Wells Fargo: Housing Market Becoming ‘Unstuck’

Wells Fargo Securities, Charlotte, N.C. said the housing market–stuck in low gear during most of the recovery–is showing signs of picking up and becoming “unstuck.”

“Job growth has improved. Household formations have increased and, while the homeownership rate dipped slightly in the first quarter, it rose solidly during the second half of 2015, hinting that a bottom may have been put in,” said Mark Vitner, senior economist with Wells Fargo, in a published commentary. “Retirees are again seeking out sunnier and warmer climates in the Sunbelt, and a growing number of buyers who lost their homes during the onslaught of the crisis are again becoming eligible for a mortgage. Sales of new and existing homes through the first three months of this year are running slightly ahead of their year-ago pace. Residential construction has also ramped up, with single-family housing starts through the first three months of 2016 surging 22.2 percent ahead of their year-ago level.”

Vitner said while improving, the housing market still does not have the wind at its back, as affordability and supply constraints are likely to remain obstacles in the near term. “Headwinds are lessening, however, and we expect new home sales and new single-family construction to both post double-digit percentage gains this year, even with overall real GDP growth rising less than 2 percent,” he said.

Vitner noted in the aftermath of the Great Recession, homeownership took strong hits. The homeownership rate fell steadily after reaching a record high 69.2 percent in early 2004. In 2015, the homeownership rate stood at just 63.7 percent, the lowest level since 1967.

“The housing market has been stuck in low gear throughout most of this recovery, as a dwindling proportion of households have chosen to purchase a home and persistent affordability hurdles have prevented renters from becoming homeowners,” Vitner wrote. “The lack of new home buyers has restricted new home construction and also rippled through other parts of the housing market, preventing younger households from building equity and limiting trade-up activity. The refinancing boom, sparked by record low mortgage rates, has also tended to keep homeowners locked into their current residence, with many owners no longer interested in trading up or downsizing from their current home.”

Wells Fargo said younger households are driving the resurgence, with urban population growth outpacing suburban growth during the first four years of this decade, reversing a trend that had been evident since World War II.

“As winter turns to spring, some of the headwinds that have slowed the housing recovery appear to be abating,” Vitner said. “As the U.S. economic expansion nears its seventh anniversary, a growing number of buyers who lost their homes during the onslaught of the crisis are again becoming eligible for a mortgage. This group, referred to as ‘return buyers’ or ‘boomerang buyers,’ has played a significant role in the housing market over the past decade and is likely to continue to do so over the decade ahead.”

This entrance of return buyers into the market is likely to provide a “welcomed boost” to demand for housing and residential construction over the next decade,” Vitner added.

The report said progress will likely remain steady and gradual. “The momentum in the housing market is shifting from the apartment market to for-sale housing and, with limited inventories of new homes available for sale, new single-family home construction is finally gaining traction,” Vitner said.