Housing Market: Why Home Prices Will Fall in 2016

housing marketWith one month already behind us, moving further into 2016, the U.S. housing market looks like it’s on shaky ground. This could be the year when home prices decline—for the first time since 2011.

Let me make my point very clear: I don’t expect the U.S. housing market to witness an outright collapse like the one we saw between 2007 and 2011. But I do expect prices to soften. Let me explain…

Several Factors Spell Trouble Ahead for Housing Market

There are two things needed for home prices to go higher: there must be demand from buyers (especially first-time homebuyers) and homes must be affordable for consumers. As it stands, both of these factors are working against the housing market and housing prices.

The demand for homebuyers is waning off.

In the month of November (the most recent numbers available), existing-home sales were registered at the slowest pace in 19 months. They plunged 10% from the previous month and 3.8% from a year ago. This was also the first year-over-year decline in existing-home sales since September of 2014. The annual rate of existing-home sales was 4.76 million in November, down from 5.32 million in October. (Source: National Association of Realtors, December 22, 2015.)

First-time homebuyers accounted for 30% of all existing-home sales in November—down from the previous month and a year ago. In a normal market, you’d want to see first-time homebuyers making up 40% of the sales.

The chart below is of housing starts in the U.S. economy. This chart really puts the demand picture into perspective.


Chart courtesy of www.StockCharts.com

You can see that over the last two years, housing starts in the U.S. economy were flat. Also, when you look at the left side of the chart, you see the pace of new homes being built is way too far from getting to the same point where it was prior to the housing market collapse—we’re still roughly 50% below the peak.

As for affordability in the U.S. housing market, I refer to the “Housing Opportunities and Market Experience Survey.” In this quarterly survey, households (renters and owners) are asked about the housing market, including their plans on buying houses, getting mortgages, and where they think the U.S. housing market is going. (Source: National Association of Realtors, last accessed January 5, 2016.)

I have identified three key findings from the survey (they paint a negative picture for the U.S. housing market):

  1. When renters were asked why they don’t currently own a home, 53% of them said they just couldn’t afford to buy one
  2. 65% of households are currently renting, as they believe it would be somewhat difficult to obtain a mortgage
  3. Among those households that are renting, 45% believe the U.S. economy is currently in recession

U.S. Housing Market Outlook for 2016

Dear reader, don’t buy into the optimism that the U.S. housing market will be fine and that 2016 will be a stellar year. As I see it, the stars are lining up perfectly for a decline in home prices. A strong U.S. dollar will make it more expensive for foreigners to buy homes in the U.S. And the collapse in oil prices will affect oil industry-based states like Texas. Like every other industry, the housing market will suffer in 2016 as the economy continues to weaken.