Jobs, Affordability and Interest Rate Hikes: A Look at the 2015 Housing Market’s Top Issues So Far

 

We’re halfway through 2015 and the summer homebuying season is in full swing, which makes now a good time to reflect. The housing market has shown clear signs of improving, but affordability and inventory continue to be issues for some buyers. The latest jobs outlook was mixed; not all good, not all bad. Meanwhile, experts continue to debate how these factors and others will affect the prospect of a Fed interest rate hike. As we look ahead to the rest of the year, these are the stories that are likely to come up again and again, so it’s worth taking a deeper look at where we are now.

Housing Market Shows Signs of Improving

In a report last month, Realtor.com wrote that the U.S. residential real estate market is on track for its best year since 2006. The article points to the creation of more than three million jobs over the last 12 months as evidence that the economy is seeing real improvement. Moreover, more than one-third of those jobs have reportedly gone to 25- to 34-year-olds, a demographic group that in America often corresponds with first-time buyers.

The Debt Challenge

However, high student loan debts are a new factor affecting those younger first-time buyers in a way traditional first-time buyers didn’t have to deal with. The Wall Street Journal recently wrote that a new survey revealed that many Americans remain “financially and psychologically scarred” about their prospects for affording a home.
 The Affordability Challenge
The same article reported affordability to be a serious problem for 60 percent of the survey respondents. Half were reported to have made at least one sacrifice in the last three years, such as taking a second job, putting off saving for retirement, or racking up credit card debt in order to afford rent or mortgage payments.

The Inventory Challenge

One reason affordability remains a challenge for some homebuyers is the current lack of entry-level inventory. In a recent panel discussion, two real estate economists claimed many builders weren’t building the type of homes buyers want.
Forbes reported that groundbreakings for May were on track for an annual rate of 1.036 million, yet a figure of 1.5 million groundbreakings this year is reportedly what is necessary to bring supply in line with demand.

Job Growth Is Helping the Housing Market

Speaking of supply and demand, one reason demand for new homes is up is thanks to improvements in the job market. The government’s June jobs report was just released with a note of disappointment — a revised hiring estimate was brought down by 60,000 jobs, the labor force shrank as some job seekers left the market and wage stagnation continues to be an issue. However, FiveThirtyEight points out that the country has added jobs for 57 consecutive months, and while no jobs report has been perfect, it’s been three years since the country has had a truly bad month for job growth.
Moreover, the outlook for future jobs growth continues to be viewed positively by experts. Doug Duncan, chief economist at Fannie Mae, told Forbes “The pickup in jobs is resulting in some increase in real incomes, so the demand side [for housing] is strengthening faster than the supply side.” Duncan said the country is on track to add two million new jobs this year.
Interest Rates Still Expected to Rise
An improving housing market paired with healthy job growth undoubtedly leads to one question: How soon will the Fed raise interest rates, and by how much? Much of the housing news coverage over the last few months has focused on this question. Despite a lot of coverage and predictions, the answer to that question remains elusive.
In the first quarter, Janet Yellen first raised the prospect of a rate increase sometime this year. Some of Yellen’s Federal Reserve colleagues then weighed in with their opinions of how and when such increases should take place. Nearly all predictions were tied to strong job growth, which didn’t materialize quite as expected.
The Employment Factor
June’s mixed jobs report only added to earlier 2015 data suggesting that while employment was headed in the right direction, progress wasn’t as sure-footed as projected. While an earlier prediction had the Fed raising rates in June, that didn’t materialize due to less than stellar job reports. September was the revised prediction. Despite the June jobs report, Fed officials still predict a September rate increase.

International Economic Factors

Beyond U.S. employment concerns, wider macroeconomic factors are also in play. A declining dollar in April was part of the reason the Fed decided to put off a rate increase in June. However, experts at the time expected the dollar to still increase over time.
In Europe, a considerable amount of financial attention is going to the situation in Greece, where a default on an IMF payment at the end of June was followed by a historic “no”-vote referendum rejecting Greek creditors’ austerity plan. However, Bloomberg reported ensuing declines were “muted.”
“After five years, you have to believe a measure of the news from Greece is already built into the market,” said one investment strategist. “How many times can you be concerned about the same news? I think it loses its effectiveness over the near term.”

Conclusion

None of these stories for the first half of 2015 are finished. They’re all still being written. We don’t have clear answers on how much job growth we can expect and whether it will help home-buying affordability, and it looks as though interest rate hikes may be coming and the Greek crisis may yet add some further uncertainty to the plan.

 

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