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Economic Forecasts

Rising Interest Rates Won’t Derail Housing Market

Kiplinger's latest forecast on housing starts and home sales

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GDP 1.5% growth for the year; a 2.1% pace in '17 More »
Jobs Hiring at 150K-200K/month through '16 More »
Interest rates 10-year T-notes at 2.5% by end '17 More »
Inflation 2.0% for '16, 2.4% in '17 More »
Business spending Slight gain in '17 after flat '16 More »
Energy Crude oil trading from $40 to $45 per barrel in Dec. More »
Housing Single-family starts up 9% in '16, 11% in '17 More »
Retail sales Growing 3.7% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, matching increase in '16 More »

Housing starts jumped in October, but the surge is unlikely to last. Starts increased by 25.5%, to a seasonally adjusted annualized rate of 1.323 million units in October. Multifamily starts bounced back from a sharp decline in September, increasing by 68.8%. Single-family starts rose 10.7%. Stronger momentum for single-family residential construction indicates that builders are responding to rising home prices and steady demand. Permits barely rose in October, however, so starts are likely to give back some of their gains in the next report. We think that single-family starts will increase by 9% and multifamily starts will drop 1% for 2016 as a whole.

With the recent increase in mortgage rates, a modest decline in sales volume is likely to occur in the next few months. Sales of existing homes rose 2%, to 5.6 million seasonally adjusted annual units in October – the fastest pace since February 2007. This was the second straight monthly gain and the sixth in the past eight months. All four Census regions recorded increased sales, with the West having the largest year-over-year increase. Inventory of existing homes declined 0.5% in October, to 2.02 million homes available for sale. Inventory is now 4.3% lower than a year ago. The pickup in the pace of residential construction this year is a good sign that overall supply of homes will steadily increase, providing more choices for buyers and encouraging homeowners who want to trade up but have been worried about finding a new place to put their property on the market.

See Also: All Our Economic Outlooks

The S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 5.5% year-over-year in September, up from 5.1% in August. The index has now surpassed its previous peak of July 2006. Seattle, Portland, Ore., and Denver reported the highest year-over-year gains, while New York and Washington posted the weakest price appreciation. Low inventory of new and existing homes is pushing up prices across the country, particularly for would-be buyers looking for lower-priced homes.

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Rising mortgage rates are likely to slow down home price growth in the next few months. Mortgage rates have risen about half a percentage point since the election. The impact of rising rates is likely to be greater for home values in the higher end of the price range. Lower-priced homes are in short supply and high demand across most metro areas, so price growth is likely to stay strong even with the increase in borrowing costs.

See Also: Money-Smart Tactics to Prosper in This Hot Housing Market

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