Study: Economy On More Solid Ground, Housing May Soon Follow

Now that the overall economy is on more solid ground, Wells Fargo economists suggest that housing may soon follow in its footsteps, according to Wells Fargo's Housing Chartbook for October 2014 released on Thursday.

The second quarter real GDP growth was recently revised to a higher annualized rate of 4.6 percent, and the unemployment rate has fallen below 6 percent for the first time since 2008. Data on consumer spending and employment for the third quarter suggests that the economy will close out 2014 on a high note, according to Wells Fargo. The economists indicated in the report that they believe real GDP growth will average 3 percent per annum for the next two years.

Improvement in the economy, however, has not translated into improvement for the housing market to date except for a few isolated markets such as Austin, Charlotte, and Nashville, all of which experienced strong employment and income growth, according to Wells Fargo's report. New and existing home sales remain disappointing despite the improved economic conditions, with investors stepping away at a faster rate than traditional buyers are returning. Many new households choosing renting over buying, according to Wells Fargo.

While some predict that the housing market is poised for more rentals than buys for years to come, particularly among millennials, Wells Fargo suggests the contrary. Because foreclosures, delinquencies, and mortgages in a negative equity position have all been steadily declining over the last few years, Wells Fargo economists predict that home sales will improve and the demand for mortgages will revive once households are more confident about income and employment. Tighter lending standards have prevented many from obtaining a mortgage loan, according to Wells Fargo.

New home sales saw an 18 percent increase nationwide in August, sending them to their highest level since 2008. The Northeast and West experienced the largest gains in new home sales with 29.2 percent and 50 percent, respectively, according to Wells Fargo. The surge in new home sales matches the monthly gain in builder sentiment; the National Association of Home Builders (NAHB)/Wells Fargo Home Builder Sentiment Index jumped 4 points in September up to 59, its best score in nine years.

Existing home sales fell off by 1.8 percent in August, but the decline in all-cash transactions (down 6 percentage points to 23 percent) suggests that investors are becoming less active in the housing market, according to Wells Fargo.