2016 home values continue to show steady improvement. Still, for people facing decisions about buying, selling, or refinancing a home in the months ahead, the issue is not what has happened so far, but what is likely to happen between now and the end of the year – and what could go wrong.
Looking at the course home values are on, as well as at what could accelerate the rise in home prices and what could reverse that rise, can help consumers make better decisions about buying or selling strategies, as well as when to refinance.
2016 Home Values: The Current Course
The first step in gaining perspective to where home values are going is to look at where they've been.
Over the long run, dating back to the beginning of 1975, the average home price nationally has appreciated at an average rate of 4.84 percent per year, based on the S&P/Case-Shiller National Home Price Index. Things heated up considerably in the last five years of the housing bubble, with home prices gaining an average of 10.08 percent a year during that period.
Then came the crash. Following the peak in July of 2006, home prices fell over a five-and-a-half year period at an annual rate of 5.58 percent. In the end, the total decline was 27.41 percent. What this boom-and-bust period demonstrates is that at any given time, housing conditions can be very different from the long-term average growth rate of 4.84 percent.
Fortunately, the housing market has had a solid recovery over the past four years, regaining value at an annual rate of nearly 7 percent a year. However, it is instructive to break this recovery down into two halves. In the first half of that recovery period, home prices bounced back strongly, at 9.26 percent a year. Since then though, they have settled into a more modest growth rate of 4.77 percent a year – almost exactly the long-term average of 4.84 percent.
Given that job growth continues to click along healthily, and that mortgage rates remain low, a strong case can be made for maintaining this current course. That would put the average home value nationally about 4 percent higher at the end of 2016 than it is now.
Remember though, these are national trends. Your local conditions may be very different. What you can take away from this is that conditions nationally indicate slow and steady growth, but you have to layer over that the local conditions that are affecting price trends in your area.
2016 Home Values: The Case for Faster Growth
As the housing boom demonstrated dramatically, conditions can change quickly. The housing market might not continue on its current slow-but-steady course. A case could be made that the growth rate will accelerate.
The case for an acceleration in the pace of home price increases is based on supply and demand. On the supply side, better loan performance has resulted in fewer foreclosures and thus fewer distressed sales flooding the market. The default rate on primary mortgages has plunged dramatically from a peak of 5.67 percent in May of 2009 to 0.77 percent in March of 2016. This means that the pipeline of foreclosures should continue to dry up, keeping the supply of distressed sales in check.
On the demand side, tighter credit standards following the housing collapse kept a strict check on how many people could qualify to buy a home. Suddenly though, this seems to have changed. According to a survey by the New York Federal Reserve, a year ago the rejection rate for primary mortgage applications was 24.5 percent. Now, that rejection rate is just 5.7 percent. If it has gotten that much easier to get a mortgage, expect demand to strengthen.
With these trends towards tightening the supply of distressed properties and loosening the loan standards that affect demand, the pace of housing price growth could easily accelerate over the remainder of the year.
2016 Home Values: The Case for Slower Growth
The factor most likely to slow the pace of home price growth is if mortgage rates start to rise. What could cause that to happen? Perhaps a hint of inflation.
Inflation has been unusually low in recent years, and two key contributors have been plunging oil prices and a rising U.S. dollar. Both these trends have reversed in recent months. Since lenders need to charge interest rates that exceed inflation, any hint of rising inflation could result in higher mortgage rates. If they move too much higher, all of a sudden home buyers will be forced to put more of their money into interest payments, leaving less to go towards the price of the home. Thus, higher mortgage rates could have a dampening effect on home price increases.
While the possibility of higher mortgage rates is something that could slow the housing market in the second half of the year, to some extent the conditions that would put upward pressure on inflation and interest rates would also be likely to accompany stronger economic growth. If that were the case, there would be something of an offset to housing demand between higher rates and stronger growth. In contrast, there does not seem to be an immediate offset for the favorable influence of lower defaults and higher loan approval rates.
This suggests that the odds favor a modest acceleration in home price growth between now and the end of the year, resulting in something a little stronger than a 4 percent gain. If you are planning on buying, selling, or refinancing a home, think about your plans in that context – but keep a close eye on the market because things can change in a hurry.