With the fall real estate market approaching, now is a good time to go over some of the most prominent summer real estate trends and what they might mean for the future of the housing sector.
No more than a decade removed from one of the worst recessions in American history, U.S. real estate has proven its resilience once again and fought back to prominence. For what it’s worth, the real estate market has been on an upward trajectory every year since the recovery became pronounced, and 2016 has yet to become the exception. In fact, this year still has the potential to be one of the best years for real estate that we have seen in a decade. The impressive momentum we saw build up in 2015 has carried over into this year seamlessly, and was more or less built upon — so much so that it’s hard not to remain encouraged by the direction of the real estate industry. We could very well see today’s summer real estate trends impact housing for the better for the next couple of years.
Up to this point, 2016 has done a great job in setting the foundation for an encouraging outlook, at least for the foreseeable future. Outside of boasting the best spring and summer real estate market we have seen in quite some time, the first half of 2016 saw home sales increase five percent from the first half of last year and median existing prices set a new record in June. For all intents and purposes, the U.S. real estate market couldn’t have started off on a better foot —given the amount of available inventory it had to work with.
The real estate market we are currently lucky to partake in is firing on all cylinders, which begs the question: How long will it last? Are today’s summer real estate trends really indicative of a bright future, or more like a flash in the pan.
Without getting ahead of myself, I want to make it abundantly clear that predicting the real estate market is a fool’s errand. Nobody, regardless of the insight they are privy to, can predict what will happen in the real estate industry without at least a slight degree of error. It is, however, entirely possible to make educated guesses based on summer real estate trends — so long as you understand they are just that: guesses.
With that in mind, it is entirely possible for today’s summer real estate trends (in addition to a little historical context) to give us some valuable insight into the future of the real estate industry. Without further ado, let’s take a look at some of the broader economic indicators, and how they may impact the future of the real estate industry for the next couple of years.
Not surprisingly, the economy is projected to expand for the foreseeable future, albeit at a slightly slower pace than we saw over the course of the recovery. With the depths of the recession no more than five years ago, it’s safe to assume accelerated growth patterns helped us get to where we are today. So while the economy should continue to push forward, it will do so at a slower pace than we have grown accustom to. According to the latest ULI Real Estate Consensus Forecast, the country’s gross domestic product (GDP) is expected to hover just below the 20-year average.
A strengthening economy will buttress America’s employment rate, as a healthier economy will promote the creation of jobs. Entering into the final stretch of 2016, we have seen drastic improvements in the country’s unemployment rate already, but experts don’t expect the progress to end anytime soon. The ULI Real Estate Consensus Forecast projects today’s unemployment trend to continue, staying at or slightly below the five percent mark.
No more than seven years ago, unemployment reached 10 percent. Today’s numbers, on the other hand, represent a significant improvement over 2009. It is important to note, however, that while unemployment rates are expected to go down, job creation may as well.
According to Inman, employment growth, “which also bottomed out in 2009 with 5 million jobs lost, is expected to remain above the 20-year average but decline between 2015 and 2016 by about 11 percent to 2.5 million jobs gained. That number is expected to continue downward, with a predicted 1.5 million jobs gained in 2018 (the lowest annual growth in eight years).”
The economy looks to be headed in the right direction, which begs the question: what does it all mean for the real estate sector? Not surprisingly, the strengthening economy bodes well for the future of the real estate sector.
In fact, expectations set by the Urban Land Institute’s forecast just six months ago have already been recalibrate to reflect a more positive outlook. If for nothing else, the success of the 2016 real estate market has suggested that the next two years may be even better than most expect.
One indicator to keep an eye on will be home prices. We are unlikely to see home prices increase by as much as 5.0 percent, as they are expected to finish out in 2016, but the following two years should see prices continue to grow at a slower rate. 2017 and 2018 will benefit from incremental increases in home values, 4.3 percent and 3.9 percent respectively, according to the Federal housing Finance Agency.
It’s worth noting that a slowdown in the pace of appreciation rates isn’t bad news, but rather more indicative of a balanced market. Prices have come a long way since they bottomed out during the Great Recession, and in a relatively short period of time. The next two years should see appreciation rates return to more normal levels.
The return to normalcy could potentially reign in the average cost of renting as well. Over the past few years, more and more people have transitioned from owners to renters. In fact, today’s homeownership rate is lower than it has been in quite some time. Far too many people have found the cost of housing to be too much, and have decided to rent for the time being. As a result, rental costs have increased dramatically. However, with appreciation rate increases expected to temper, we may see more people — millennials in particular — make the jump from renter to owner.
According to the ULI Real Estate Consensus Forecast, “apartment vacancy rates to rise on a small scale from 2016 to 2018, when it’s expected to reach 5.4 percent, a rate still stronger than the 20-year average.”
Of particular importance, however, is the future of housing starts over the next few years. If for nothing else, inventory levels, or lack thereof, are one of the only things holding back the current recovery. Today’s supply simply hasn’t been able to keep up with demand. Fortunately, it would appear as if hope is finally on the horizon.
According to Inman, single-family housing starts are “expected to increase from around 715,000 to 800,000 units in 2016, a trend that will continue with 850,000 and 900,000 new units expected in 2017 and 2018, respectively.”
New construction should alleviate the housing crunch, and essentially allow more people to buy homes. Provided things work out in the way industry pundits predict, this could be the single most important indicator moving forward.
It’s safe to assume that today’s summer real estate trends will not continue at the pace they are currently on. However, they should pave the way for a bright future. The next two years should bare witness to an encouraging housing market, and those on the front lines will be rewarded accordingly.