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Location, Location, Location: The U.S. Housing Market’s Recovering But by How Much Will Depend on Where You Live
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Location, Location, Location: The U.S. Housing Market’s Recovering But by How Much Will Depend on Where You Live

Walking down a street in the U.S., you’ll see not just a window to a home but one into the community and lives of the residents. From economics to quality of life, housing can tell us much about the state of Americans today. So having a clear sense of where this market is headed is crucial to understanding consumers. But what does the future hold?

Overall, the big picture is promising. On the national level, the housing market should continue its moderate but steady recovery. Median single-family home prices are on track to rise an average of just over 2 percent between 2015 and 2018. When you get down to the local level, however, wide discrepancies appear among states and cities. Some markets will likely soar ahead while others will remain very much distressed.

The Demand Institute, a non-advocacy, non-profit think tank jointly operated by The Conference Board and Nielsen, recently took a look at future of the U.S. housing market through the lens of America’s communities. The research is grounded in an analysis of 2,200 cities and towns in America coupled with in-depth interviews with 10,000 U.S. consumers. To gauge the future health of the market, the Demand Institute’s recent report looked at how home prices, home sales, and construction are likely to evolve over the next five years at the national level, and in the 50 largest metropolitan areas.

The National Outlook

The U.S. residential housing market’s road to recovery has been a bumpy one, trailing the broader economy’s recovery for several years after the recession. Now, however, home prices, existing home sales, and new home construction all point to the fact that the market is recovering.

Housing prices are firming, and the market should continue to stabilize steadily. The Demand Institute forecasts that price appreciation will slow to an average of 2.1 percent over the next two to four years as supply and demand equalize. So by 2018, the national median price for a single-family home will be close to, but still below its 2006 peak. The effects of the Great Recession will remain, however; when adjusted for expected inflation, the median price will be 25 percent below its pre-recession level.

Growing demand from a rise in new households will fuel the national housing recovery over the next five years. While many young people have found it difficult to set out alone financially since the financial crisis, rising confidence from the forecasted strengthening of the U.S. economy and better job prospects is encouraging them to form independent households. And in 2014, household formation is likely to return to its trend rate of nearly 1.3 million net new households.

Increased demand will, in turn, feed new construction, which collapsed during the Great Recession. Total housing completions will near 1.5 million by 2015. However, home ownership won’t rise above 65.5 percent of all homeowners by 2018, well below the 69 percent high near the apex of the housing bubble. Many newly forming households will still need to rent instead of buying due to finances remaining constrained. As a result, in 2018, 30 percent of new homes will be multifamily units, double the amount at the height of the boom.

The State Outlook

The U.S. is a vast country with varied populations, and these differences are affecting the housing recovery on the state level. In most cases, the extent of recovery is closely tied to how much or little prices inflated during the bubble—and subsequently crashed. So while forecasts show the median price for a single-family home at the national level will be approaching its pre-crisis peak by 2018 in nominal terms, this will not be the case in 18 states.

Nonetheless, the markets in most states are simply recovering to equilibrium—and not heading toward overheating. In only 11 states will demand for single-family homes exceed pre-crisis peaks by 2018. Over the next five years, however, single-family home completions in every state will remain below the previous peak. By contrast, multifamily home completions will continue to rise in many states and make up a larger part of total completions than pre-crisis, reflecting a shift in demand to renters from owners.

The Metropolitan Outlook

Similar to rationalities at the state level, the housing recovery will vary across the largest 50 metropolitan statistical areas (MSAs) measured by population. The median price of a single-family home will exceed its prior peak by 2018 in about half of the MSAs the Demand Institute analyzed.

While the housing market is on the road to recovery, there will likely be a few bumps along the way. And although there is no imminent risk of another housing boom (and bust), home price growth will make only a modest contribution to overall economic growth. That means we cannot expect a slow and steady housing market recovery to undo all the damage the financial collapse caused to many cities and towns across America. However, housing still presents a chance for growth.

Today, approximately 65 percent of Americans own a home, but nearly three-quarters believe home ownership is an important goal. What amounts to the unmet housing desires of approximately 11 million American households presents many opportunities. For example, financial services companies might consider new models—including lease-to-own or shared equity—to help those struggling to finance a home purchase. Private, seller-financed mortgages and peer-to-peer lending may also grow in popularity, an enormous market for expansion when you consider that $1.5 trillion currently changes hands each year between consumers buying and selling homes in private transactions. And for long-term renters, urban planners and architects might consider incorporating some of the desired features of a single-family home—for example, more outdoor space, private laundries, and off-street parking—into rented, multifamily homes to make those options more appealing.