Looking Back on 2016 and Forward to 2017

Positive Equity by Numbers: What Investors Need to Know About This Important Market Trend  
March 30, 2017

Looking Back on 2016 and Forward to 2017

Looking Back on 2016 and Forward to 2017

2016 Recap

What a year 2016 was, but as volatile and politically charge as it was, the housing market had a pretty good year:  Prices were up 5.61%, rates remained low but crossed the 4% threshold for the first time in 24 months, home prices crossed their 2006 peak, and home production continues to lag demand.

Overall US home ownership remained little change from Q4 2015 to Q4 2016, at 63.80% and 63.70% respectively.   However, the Wells Fargo Housing Opportunity Index (HOI) moved from 63.3% in Q4 2015 to 59.90% in Q4 2016.   The drop in affordability is due to the combination of continued rising home prices and rising mortgages rates with (as yet) no significant income gains.

Our affordability/Ownership (A/O) Ratio likewise moved downward to a negative 5.97%, meaning slightly more people own homes than can afford them.  Its entire move was due to the HOI index moving down since the ownership percentage was more or less flat.   But take heart, the A/O was a whopping negative 39% in 2006.

Of our sampled metro areas (see charts below), the following had improving A/O ratios (see charts on next page):  Atlanta, Charlotte, Cleveland, Detroit,  Las Vegas and New York Metro.   The biggest declines were Dallas, Los Angeles, Miami, Portland Or, San Francisco, San Diego and Seattle WA.

Keep in mind that the A/O index measures the balance between affordability and the ownership rate:  If affordability stays the same, but ownership goes down, the A/O will improve. Alternatively, if affordability goes down and ownership goes up, the A/O will go down proportionally further.

2017 Expectations

The following are our thoughts for 2017:

Affordability will continue to decrease due to the continued shortage of moderate to lower priced inventory. This will continue to keep first time and medium-income buyers under-represented in the market.   Wages are rising in urban areas, but as our charts show, these same areas are also too pricey for most entry-level earners.   The lack to land development financing, higher urban land cost, and under-participation by smaller builders are all contributing factors.

Home prices will rise, but at a lower pace. This and tight supply, is good news for home builders, but they should caution on knowing their end buyers affordability profile.   Paying for higher lot prices can’t just be solved by increase house sizes and prices.

Mortgage Rates will be volatile. Long-term rates are ultimately governed by inflation expectations.   It is hard to imagine inflation really taking hold if wages are not significantly increasing.  On the other hand, protectionist trade policies are inflationary.   This dynamic will continue to play out over the year.  Most experts expect rates to range from 3.75% to 4.6% in 2017.