Tag Archives: Capital Economics

Lower rental yields might cause investors to lose interest in the housing market, but according to Capital Economics, that scenario is unlikely to play out this year. Currently, the increase in home prices is outpacing the rise in rents, which ""is weighing on rental yields,"" the firm noted in a report authored by the property economist Paul Diggle. However, Capital Economics stated the reduction in rental yields is actually ""very gradual"" and the ""the total return from housing remains attractive."" Thus, investors, who analysts say are driving the recovery, are not expected to exit the market just yet.

Housing inventory is now at its lowest level since January 1994; home sales have exceeded listings for the past 25 months; and the upward trajectory in home prices starting at the end of last year continues, according to the latest ""US Housing Market Monthly"" from Capital Economics. Home sales are ""normal"" relative to population, but supply remains low, according to the firm. House prices increased 9.7 percent year-over-year in January, continuing a recent trend, and prices show ""no signs of an imminent slowdown,"" according to Capital Economics.

Strong demand and tight inventory have brought existing home sales back to ""normal"" levels, and further gains are possible, according to the latest market report from Capital Economics. Additionally, market conditions may prompt lenders to ""loosen the purse strings slightly"" and lend a little more freely. These conditions, combined with broader economic indicators, lead Capital Economics to revise its previous forecast of a 5 percent price gain this year up to 8 percent. Next year's projection is a smaller 4 percent gain.

Housing starts declined 8.5 percent from December to January but remain 24 percent above last year's rates, according to recent data from the Census Bureau and HUD. Capital Economics points out that the recent decline is largely driven by the multifamily sector, while single-family starts actually rose 0.8 percent over the month. The general upward trend in housing starts is tied to recent declines in distressed inventory, according to Capital Economics. ""[H]omebuilders are starting to benefit from the dwindling supplies of deeply discounted distressed homes, which for a while were next to impossible for builders to compete with,"" the analytics firm stated.

With the increase in home and equity prices, Capital Economics suggests net household wealth may be on its way to rising above pre-recession levels later this year, which will lead to a boost to GDP. In a recent report, the firm forecasts the S&P 500 equity price index will end 2013 close to the current level of 1,500 and expects home prices to rise in the neighborhood of 5 percent. In turn, the growth in household wealth, the analytics firms says, could lift GDP by around 0.7 percent.

The low supply of housing stock recently reported is giving Capital Economics reason to believe home price forecasts under 5 percent are actually conservative estimates. Realtors in December expected prices to rise by about 3.5 percent over the next year, while consumer estimates were more modest at 2.5 percent for the same time period, according to a monthly housing report from the firm. But, with the low supply of inventory, Capital Economics anticipates much bigger gains in the future.

Capital Economics expects home prices to increase about 5 percent over the year at a national level. However, housing markets across the nation are markedly different, and this 5 percent will not be a constant in all regions. At the two far ends of the spectrum, the Northeast and the West will experience far different market climates this year, according to Capital Economics. The Northeast is much more likely to see no price growth at all than anything close to the 5 percent national average this year, the analytics firm stated in a recent outlook.

As the National Association of Realtors reported, home sales dropped in December. However, Capital Economics warns this should be no cause for despair. ""[M]onthly changes are volatile,"" the analytics firm stated Tuesday, adding that three-month averages are often more indicative of market trends and the numbers from a single month. Based on the three-month average, existing-home sales are still on the rise.

In a commentary from Capital Economics, economist Paul Diggle declared existing home sales are now at a ""historically-normal level"" relative to population after breaking past the five million mark. The NAR reported existing-home sales in November rose to a seasonally adjusted annual rate of 5.04 million. Based on pending home sales in November, the firm's calculation shows existing-home sales in December should increase to an annual rate of 5.15 million. NAR is scheduled to release data on existing-home sales on Tuesday, January 22.

The long-awaited definition of the Consumer Financial Protection Bureau's (CFPB) ability to repay rule and qualified mortgage standards have been unveiled, and Capital Economics says the new rules will not hamper the housing recovery. Previously, some concern circulated the industry that the qualified mortgage rule would be too limiting, possibly shutting reasonably safe borrowers out of the market and stalling a market recovery.