2015 U.S. Housing Market Predictions Made by CoreLogic

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As the 2014 calendar year comes to an end soon, economic fundamentals will finally return to the U.S. housing market in 2015, predicts CoreLogic.

As Yogi Berra once said, "The future ain't what it used to be," is an apt description CoreLogic uses to describe the current and future state of residential real estate in the U.S. In 2014, the post-crisis economic expansion celebrated its fifth birthday and the main economic drivers were increased demand, increased consumption, capital investments and market experience, all aiding an improving market. Employment grew at an average of 2.0 percent on a year-over-year basis for the three months ending in November 2014, the strongest rate since the three months ending in March 2006, which was the peak employment growth of the last economic expansion.

CoreLogic 2015 predictions include:

• The U.S. economy is picking up steam, as strong employment growth is exhibited within the first-time homebuyer age group.

• Home sales will increase by 9 percent in 2015, housing starts are expected to grow 14 percent and home price growth is expected to moderate.

• Markets with the highest home price appreciation reflect fundamental strengths of their economies, particularly technology and energy. However, the drop in oil prices may alter the equation.

• The lower-end home price category is growing faster than the higher-end price category in the top 25 U.S. markets, reflecting tight supply and lack of new construction.

Perhaps the most important economic trend though, is that employment growth for millennials began to markedly improve in 2014. Most notably, the 25-to-29-year-old segment experienced a 3.0 percent improvement in employment growth, which is one percentage point higher than the overall employment growth rate. While part of the improvement is the demographic transition of Millennials as they age, it is still very good news, because this age cohort is the key first-time homebuyer segment. Moreover, younger households exhibit more mobility and higher marginal tendencies to consume from income, so stronger employment growth should manifest itself in higher spending.

The economic fundamentals in early-to-mid 2014 became stronger as oil prices began to slide. Oil prices are currently down about 45 percent since June, and this downdraft provides even more economic growth tailwind heading into 2015. Households in the U.S. spend more than $1,800 on energy-related costs annually and 22 percent of that energy consumption is due to residential real estate. So while the drop in oil prices has typically been linked to a reduction in driving-related expenses, it clearly also reduces energy-related expenses for residential real estate.

The improving economic backdrop helped the housing market withstand the modestly higher-rate environment in the early part of 2014, especially given continued rapid home price appreciation. In December, mortgage rates dipped below 3.9 percent for the first time since May 2013 when rates spiked and led to a slowdown in sales in the second half of 2013 and first half of 2014. While rates are still very low, home prices are not. It is clear that the low-rate environment has benefited home prices, as price-to-income and price-to-rent ratios are high. This indicates home price growth going forward will be fairly muted.

Looking ahead to 2015, stronger economic fundamentals mean demand for housing is expected to increase, with overall sales projected to increase to 5.8 million in 2015, up 9 percent from 5.3 million in 2014. Total housing starts are expected to reach 1.1 million in 2015, a 14-percent year-over-year increase. This upsurge is healthy, but it's still 23 percent below the 1.45 million average seen over the last 50+ years. The 30-year fixed mortgage rate is only expected to rise to 4.3 percent, up from 4.2 percent in 2014. Mortgage rates should not increase much, as inflation is low, with minimal upside risk given the deceleration in home price growth and drop in oil prices, the two largest segments of consumer inflation.

While there has been much discussion about opening the credit box, it's been just that - all talk. Analyzing the most recent data on the three main drivers of underwriting (debt-to-income ratio, loan-to-value ratio and credit scores) reveals that purchase underwriting remains modestly tight and is not loosening yet. While there has been clarification on GSE loan put-backs and new low down payment products, the impact of both will be fairly modest because the weak originations market reflects not just a modestly tight supply of credit, but very weak demand.

From a regional and market perspective, two clear trends are emerging as we move into a new year. First, markets are becoming more organic with economic fundamentals driving sales and prices since the distortion from distressed sales has significantly declined. Second, lower-end home prices are accelerating at a faster pace than higher-end prices in the largest 25 markets by population.

The organic nature of a market is reflected in our list of top 10 home price appreciation markets. Four of the top 10 markets, including San Francisco, San Jose, Austin and Seattle, have high concentrations of technology industries with employment growth increasing at a 2.8-percent rate from a year ago as of October 2014, roughly twice the national rate.

Two of the top 10 markets, Dallas and Houston, have been thriving due to strong energy markets and strong household growth over the past few years. Houston, in fact, is the most interesting market to watch in 2015, given that home prices are elevated and in context of the large decline in oil prices. As of October 2014, the Houston metro area had experienced more residential construction than all but two states, which is a reflection of the city's very strong in-migration and employment growth. While the energy producing sector will be hurt by lower investments due to lower oil prices, Houston is enjoying a demographic dividend that will sustain it.

The very strong demand and tight supply of homes for the lower-end of the price distribution has led to strong gains in low-end home prices. During the fall of 2014, low-end home prices were appreciating at roughly 1.5 times the rate of higher-end home prices in all top 25 markets. The strength of lower-end prices reflects not just an affordability crunch, but also a lack of home building for single-family starter homes. While single-family construction has stagnated nationally, there are some markets that are exhibiting strong sales growth for new builds. These markets include Raleigh, Charlotte and Charleston in the Carolinas and Houston, Dallas and Austin in Texas. While each of those markets is exhibiting healthy home price growth, solid new construction builds are helping to alleviate prices from increasing further.

Overall, the economy finally appears to be gaining enough momentum to help provide the support that the housing market has needed for stronger recovery. The combination of stronger employment growth and especially Millennial job growth makes for solid footing for the real estate market. Moreover, the recent drop in oil prices cannot be overstated, because not only does it directly lower the transportation and home energy costs for households, but it also improves consumer confidence. And confident consumers are more likely to spend on big ticket items, which is sweet music to the ears of the real estate market.