Bank of the West US Outlook Report for February 26, 2016

US Outlook Report: The Housing Sector Still On Solid Ground

Despite a disappointing new home sales report for January, the U.S. housing market is poised for continued gains in the months to come.  More winter-weather in January led to mixed readings on housing starts and new home sales, but it is too early to call time on the U.S. housing market recovery. Bucking the trend, the National Association of Realtors (NAR) reported that existing home sales advanced to an annualized 5.47 million, crushing analysts’ expectations for 5.33 million and signaling that the sector will continue recovering in 2016. This was the second-highest reading since February 2007 for existing home sales which comprise more than 90 percent of all residential home sales.

Near record-low mortgage rates, steady job growth across major knowledge-based and service-providing industries and improving wages provide strong incentives to potential buyers (including first-time home purchasers) especially when rents are rising rapidly across major metro areas. Moreover, the housing sector remains a very attractive investment for domestic and foreign investors as uncertainty prevails in financial, global equity and commodity markets.

Housing starts did slip 3.8 percent to 1.099 million units in January, but remains well above their linear trend line over the past eight years and about in-line with 2015 average of 1.106 million units. Severe weather conditions adversely affected construction activity in the Midwest, where starts plunged 12.8 percent from a month ago, while they dropped 3.7 percent in the Northwest. The South (the largest region) and the West saw 3.7 percent and 0.4 percent slippage in January. We believe that the January setback in housing starts data was mainly weather-induced and is not a sign of evaporating housing activity longer-term.

New home sales fell 9.2% in January, but we are coming off a strong December at 544,000 units, the second highest level of new home sales since February 2008. Perhaps the clearest indicator of improving housing demand comes from the mortgage purchase applications data- up 28% from a year ago.

So despite issues with housing affordability and lack of housing supply in some regional markets like the San Francisco Bay Area or Southern California, our outlook for another solid year of growth for the U.S. housing market remains intact. We are expecting a 10.2 percent increase in total housing starts in 2016 to an average of 1.22 million units as rising jobs and personal incomes allow more traditional buyers to qualify for a mortgage and give them the confidence to buy.

To learn more, check out this week’s US Outlook Report.


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