US housing seen steady in early 2015; price gains slower

[WASHINGTON] US home sales will grow moderately in early 2015 before picking up the pace as a sharp slowdown in price rises and a strengthening labour market draw in potential buyers, economists in a Reuters poll predicted.

Housing activity is gradually regaining ground after stalling in the second half of 2013 following a run-up in mortgage rates. But sales remain constrained by very slow household formation.

"Housing is improving, but it is not nearly as good a market as we would like it to be. Young people are delaying forming households, that's why sales haven't taken off," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.

The survey of 29 economists, conducted Nov 18-25, forecast sales of previously owned homes at an average annual rate of 5.20 million units in the first quarter. That is below the 5.25 million units pace economists had forecast in August.

Household formation is currently running at about 500,000 a year, far below the more than one million that would signal a strong housing market recovery.

Economists pin the blame on still-high unemployment, especially among young adults, many of whom are opting to live with parents or share quarters with friends and relatives.

The survey forecast home resales at a 5.26 million unit pace in the second quarter of next year, rising to a rate of 5.30 million units in the July-September quarter.

Apart from low household formation, sales are also being constrained by the departure of investors, who were the main drivers of the housing recovery.

By snapping up homes and converting them into rental units, investors pushed up prices, leaving the goal of ownership out of reach of many would-be first-time buyers. The share of first-time buyers in the resale market is hovering at 30-year lows.

But with investors exiting, price gains have moderated from a peak above 13 per cent late last year to less than half that. A further slowing is seen, which should help mitigate an anticipated rise in mortgage rates next year.

The survey forecast the S&P/Case Shiller composite index of prices in 20 metropolitan areas would rise at an average of 3.6 per cent next year and 3.1 per cent in 2016. In August, the index had been forecast to increase at an average of 5.0 per cent in 2015 and 4.4 per cent the year after. "It is allowing housing affordability to improve," said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

But Mr Vitner said the more important driver for the market would be employment. The labour market is tightening, with job gains accelerating in recent months and the unemployment rate hitting a six-year low of 5.8 per cent.

"As job growth continues to strengthen more and more people will feel comfortable enough about their financial situation," Mr Vitner said.

Rising demand should help fuel more home building, especially in the multifamily sector. "We should see a recovery in household creation. Moreover, we think new households will have a greater tendency to rent, underpinning multifamily starts," said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. "That said, we do think single family construction has further upside." The economists in the poll forecast the 30-year fixed mortgage rate averaging 4.55 per cent next year, well below the 4.81 per cent economists had forecast back in August but up from 3.99 per cent currently.

REUTERS