Housing Market Forecast: Morgan Stanley Shares 2016 Outlook

Housing Market Forecast

As we scope out the path to recovery in 2016, Morgan Stanley provides their housing market forecast for the new year.

By Drew Knight

Reflecting back on 2015, most of those associated with the housing industry can agree that it experienced another great year on the road to recovery.

As we continue down the path in 2016, now is the time to scope out what’s ahead on the journey to housing market success. To do that, it’s going to take some looking forward and some looking back.

Morgan Stanley, a multinational financial services company, polished their crystal balls — and their calculators — to do some of that forecasting for us all. Below you’ll find the results to their research over the past few years and some predictions the company presented during its recent 2016 U.S. Housing Market Forecast webinar:

Household Formations

2016 Prediction: 1.25 to 1.3 million

“U.S. housing has been one of the few consistently bright spots in the U.S. economy in 2015,” says Ryan Gilbert, an equity analyst for Morgan Stanley. “We expect 2016 to be a positive year for both housing activity and home prices. One of the chief drivers will be sustained demand as a result of household formations remaining above long-term averages.”

According to the report, a lack of formations throughout the recovery has led to substantial pent-up demand (2.5 million households worth) that could fuel the industry in 2016.

Homeownership Rates

2016 Prediction: Down Toward 63 Percent

Because lenders are leaning toward stricter guidelines, data shows that a majority of the 1.25 to 1.3 million new households that are expected to form this year will also be rental households.

Additionally, Baby Boomers are bringing the largest amount of changes to these results, despite the fact that Millennials belong to the largest and most diverse generation the country has ever seen, says James Egan, vice president of the securitized products strategy team at Morgan Stanley.

Home Prices

2016 Prediction: +3 Percent Base Case

“From their trough in 1Q12, home prices have appreciated meaningfully,” says Egan. “However, we do not think this represents a bubble in U.S. home prices.”

Data also suggests that decelerating home price appreciation has brought home prices closer to a fair value.

New Home Sales

2016 Prediction: 575,000 to 600,000

Morgan Stanley reports that new home sales have been outpacing their 2014 levels and were up 15 percent during the first 10 months of 2015.

Still, these levels remain sustainably below long-term averages, data shows. When compared to the pre-crisis, pre-bubble period averages over 2000 to 2003, new home sales are nearly 50 percent lower.

Housing Starts

2016 Prediction: Total – 1.3 million; Single-Family – 845,000

“We project housing starts to increase to 1.3 million units, with a higher share of multifamily starts (35 percent) relative to longer-term average compared to single-family starts (65 percent),” says Egan.

Although both multifamily and single-family starts are higher, multifamily starts are at a 28-year high and have dominated the recovery.

Mortgage Credit Availability

2016 Prediction: Easing Only at Margins

Morgan Stanley believes that higher home prices, better labor market conditions and low interest rates in 2016 will contribute to expanded credit availability on the margin, although expansion may be limited.

Even though data shows that credit availability appears to be on the mend, levels pale in comparison to those before the housing crisis.

Other Considerations

  • Land and Labor: Shortcomings in this area will continue to be a supply side limitation and these shortages are impacting margins and build times. The top three concerns for 2016 revolve around the rising cost of building materials, labor shortage, lackluster job creation and income growth.
  • Return of the First-Time Buyer: Morgan Stanley reports that there is evidence of improvement at lower price points in the new-home sales data and that first-time buyers showed strong growth in the resale market over 2015.
  • Housing Affordability: Although data shows that housing is remaining affordable when compared to long-run averages, the market as a whole is less likely to be able to maintain that affordability in an environment where rates are rising.
  • Rates: Should we fear that kind of environment? According to the report, demand was negatively affected by higher mortgage payments in 2013 and 2014, but over the longer term, new-home sales and interest rates are uncorrelated.

For more in-depth information, check out Morgan Stanley’s video highlighting this report.

Drew Knight is a Digital Content Associate for New Home Source.

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