Housing Wrap Up  April 2015   Brought to you by Wells Fargo

Real GDP grew at just a 0.2 percent annual rate during the first quarter, as lower oil prices and a
stronger U.S. dollar weighed on manufacturing activity at the start of the year. Harsh winter
weather in the Northeast and some late winter ice storms in the South also weighed on economic
activity, as did the President’s Day weekend work stoppage at many West Coast ports. The
sluggish start to 2015 economic growth does not change our view that home sales and new home
construction are set for stronger gains in 2015. While data through the first six months were
mixed, home sales and new home construction through the first three months of this year are
running slightly ahead of their year-ago pace. Moreover, the more leading data on builder
sentiment, pending home sales and mortgage applications from those purchasing homes have all
strengthened in recent weeks, suggesting that the housing market has solid momentum going into
the spring selling season. So while our outlook for overall GDP growth has been trimmed back a
bit, we are just as optimistic about the housing sector today as we were at the start of the year.
Home sales and new home construction could very well be a major upside surprise in 2015.
Our optimism is tempered by the realization that many prospective buyers are still smarting from
the Great Recession. Household formation has been slow to recover, as the economy still has
1 million fewer full-time workers today than it did prior to the recession. Employment conditions
have improved more recently, however, with nonfarm employment rising by 3.1 million jobs over
the past year and the unemployment rate falling to 5.5 percent. Wages and salaries are also
growing a bit more rapidly, which suggests the quality of jobs being created has improved. The
improvement in the labor market is a big reason why household formations have increased over
the past year. The latest data from the Census Bureau show a surge in household formation over
the past year, with 1.5 million new households formed over the past four quarters. The Census
data are volatile, however, and a four-quarter moving average of this series shows a more
restrained gain of just over 1 million households. Either way the trend is up in a major way.

A Nation of Renters?
The homeownership rate declined 0.3 percentage points during the first quarter to 63.7 percent,
marking its lowest level in almost 20 years. The homeownership rate topped out 11 years ago at
69.2 percent. The slide in the homeownership rate has coincided with two epic shifts in housing
trends: the rise in a large, and possibly permanent, rental market for single-family homes and an
epic apartment boom, most notably in and around the urban core of many of the nation’s largest
and most rapidly growing metropolitan areas. How long lasting these two trends will be remains
an open question. Younger households are clearly showing a greater preference to rent rather
than buy, and a number of potential buyers of all ages are facing challenges meeting more
stringent borrowing guidelines put it place following the housing crash. Neither of the trends
presents an insurmountable challenge to homeownership.
Stronger job growth is the key to reversing the slide in homeownership. The longer that stronger
job growth remains in place, the more willing that younger people will be willing to venture out on
their own. Right now that is showing up in with increased demand for rental units, as folks that
had doubled up are shedding their roommates and renting a place of their own. The national
vacancy rate for rental homes has continued to trend lower, falling 1.2 percentage points over the
past year to 7.1 percent. Rental vacancy rates fell by roughly equal amounts in the suburbs and
principal cities. Tighter rental markets have pushed asking rents up 3.4 percent over the past
year. Before long, the Millennials will be forming families and looking to buy a home.
Stronger job and income growth and the easing of underwriting standards will also gradually
expand the pool of qualified potential buyers. The number of homeowners that owe more on their
current mortgage than their home is worth has fallen steadily over the past five years, with just
10.8 percent of homeowners in a negative equity position at the end of 2014. The fourth quarter
numbers did show a slight increase, but that seems to be the norm. The share of mortgages in
negative equity has risen during the fourth quarter in four of the past five years and this past
year’s gains was the second smallest of those four increases. We suspect that seasonal trends in
home prices are behind the fourth quarter’s small rise in negative equity and look for the share of
underwater mortgages to continue to gradually decline.
New home sales have gotten off to a strong start this year and builders generally report a rising
order backlog. We expect new home sales to rise 19 percent this year and look for a 4.3 percent
rise in existing home sales. We have also raised our expectation for home price appreciation. Lean
inventories now look to be a more permanent feature, reflecting the large number of investor
purchases which have been converted to rentals. Tract building has also been slow to return
outside of active adult communities, which means there is less supply of lower-price new homes
coming to market. Moreover, renters are not the only ones looking to move close to the city core.
A growing proportion of homebuyers are also looking to buy homes closer to key employment.