Metrostudy's National Residential Economic Report is a modeled forecast released quarterly of over- and under supply of housing in the nation, as well as over- and under valuation, which impacts the future of housing most significantly. The five-year forecast is further informed by recurring national indices that track construction starts, employment, and other key indicators, providing Metrostudy a framework to forecast the future state of housing across the nation.
Despite the Bureau of Labor Statistics' latest employment report marking job creation at the lowest level seen in five years, Metrostudy Senior Vice President Mark Boud anticipates that employment figures will be upwardly-revised next month to reflect continued growth. Over the past 12 months, Educational and Health Services, Professional and Business Services, and Construction have seen the largest gains in employment, and Boud expects rapid growth in the construction industry to continue. Compared to the second quarter of 2015, Natural Resources and Mining, and Manufacturing were the only sectors to see job losses, due to the impact of low oil prices.
Metrostudy has revised their initial forecast for residential permits in 2016 since the first quarter, from 1.2 million, to 1.28 million. Boud's new prediction translates to the construction of 1.08 million homes and apartments in 2016. Currently, every house constructed in the U.S. is creating 2.8 jobs, in contrast to the long-term equilibrium of 1.06 jobs to one house built. According to Boud, "the fact that we're higher than the overall ratio suggests that demand for housing is still increasing at over twice the rate of housing supply."
The national average for 30-year fixed rate mortgages reached the lowest points on record in 2012 (3.7%), 2013 (4.0%) , 2014 (4.2%) and 2015 (3.8%), and continued to decline in May 2016 (3.61), in reaction to stock market slumps and global economy troubles (namely China). However, Boud expects mortgages rates to "begin to rise slowly but erratically" during the latter part of 2016.
5-Year Forecast for 30-Year Fixed Rated Mortgages (National Averages):
- 2016 (estimate): 4.1%
- 2017 (projection): 4.5%
- 2018 (projection): 5.2%
- 2019 (projection): 5.6%
- 2020 (projection): 5.8%
- 2021 (projection): 5.9%
Metrostudy's projections and data for those three metrics are rolled into Metrostudy's overall housing supply and demand model, where housing supply is based off permit activity and housing starts, and housing demand is based off employment activity and mortgage rates that impact the ability for consumers to buy housing. By identifying the gap housing supply and housing demand, Metrostudy can project whether the market will be over- or undersupplied.
Boud forecasts that the housing market will be highly undersupplied in the next five years, peaking in 2018 and 2019 and then trending down (although still undersupplied). Boud warns that builders must be wary about outpricing prospective buyers. Metrostudy's affordability model examines the gap between historical median home prices and income supported home prices (based off national economic conditions and employment) from 1990 through their five-year forecast, to determine and predict whether housing will be undervalued or overvalued. Currently, housing is under-valued on a national basis, but a cycle of overvaluation is ahead in the next five years. According to Boud, "year 2016 is an 'equilibrium' year, followed by a cyclical pattern of over valuation as mortgage rates gradually rise."
Metrostudy's Opportunity/Risk Index takes all the above data into account to determine overall market conditions. Boud forecasts that the correlation between value and over- or under-supply will likely create stable market conditions and an elongated cycle over the next five years, with little appreciation potential, but underlying demand that remains healthy.
Watch Metrostudy's video above to learn more about the Q2'16 report, or compare to last month's forecast here. The second quarter report is also available for every major metropolitan market--access your market here.