The collapse in oil prices has quickly turned previously solid housing markets into questionable ones. In the latest data, North Dakota came in dead last in job changes with 9,600 fewer jobs, translating into a 2 percent reduction in overall state employment. Louisiana and Oklahoma are also losing jobs. With oil prices low, demand for coal has been wiped away and hence, West Virginia is losing jobs.

At the same time, low oil prices have been a boon for other states. Consumers have extra cash on hand from not needing to pay so much at the gas pump. Though not all of the savings have resulted in extra spending at retail shops, consumers are snapping up automobiles, eating out more, and buying homes. Auto sales, for example, have had one of the best runs since the turn of the century, with an over 18 million annualized pace for three consecutive months. 

Though there are still two additional months of data to be tallied (at press time), existing home sales in 2015 are on track to rise by 7 percent, and to have the best year since 2006 with 5.3 million unit sales. New home sales will have risen by 15 percent, and the median national home price looks to have risen 6 percent. A typical broker in 2015, therefore, would have experienced around 13 percent growth in business dollar revenue.

For 2016, the growth will continue, but not as strong. Business revenue may rise by 6 - 8 percent with most of the gain coming from rising prices and not necessarily from rising home sales. The reason for either zero or, at best, a modest growth in sales is due to the anticipated rise in mortgage rates. After being mostly under 4 percent in 2015, it will likely average 4.5 percent. That hurts affordability. In addition, home prices have risen by 11.5 percent, 5.7 percent, and 5.9 percent respectively in each of the past three years. With wages rising only by around 2 percent, the affordability squeeze will continue. As a result, the number of first-time buyers may once again be near historic lows in 2016. The existing homeowners who are also facing higher prices when buying, will be compensated by the fact that they will have increased housing equity when they sell. This housing equity will facilitate down payments for their next home purchase.

Affordability will be an issue throughout 2016 but one big bolster for housing will be job additions. Currently 46 states are adding jobs. The states in the Mountain and Pacific Time Zones are doing particularly well. As illustrated in the below table, Idaho and Utah will easily outperform the rest of the country in home sales because of a better performing local job market. California, Oregon, and Washington will also do fine, though affordability conditions are one of the worst in the country. If not in home sales, the Pacific Ocean states will see gains in home prices. The southern states of Florida, Georgia, and South Carolina will also outperform the country because of solid job gains and because homes are still affordable there.

Nationwide, the total net new jobs could be around 2.5 to 3 million. Despite a global economic slowdown, there is enough momentum in the U.S. economy to chug along - not at a great pace, but at a GDP growth rate of 2.5 percent in 2016. Housing or residential investment, as it is formally labeled by the Department of Commerce, will be one of the stars, with around 10 percent expansion – combining new home construction activity, broker commissions, and home remodeling. A weak point on the U.S. economy will be exports, which will decline from the strong U.S. dollar and from less global income. U.S. real estate sales to foreign buyers could also take a hit as a result, though not a certainty. When there is global economic turbulence, foreigners like to park their money in U.S. real estate. Let’s wait and see how this foreign demand plays out.

One area to watch out for is inflation. Most of the deflationary pressure from collapsing oil and gasoline prices will be all done by January. That is, gasoline prices will be steady and will no longer show a big decline. That means other items will drive inflation. Rents are rising at a seven-year high and could rise more based on continued falling apartment vacancy rates. It is this rent increase that will put upward pressure on the overall Consumer Price Index. The Federal Reserve, consequently, will have no choice but to raise interest rates multiple times over the next three years to assure that inflation does not get out of control. As said, the Fed policy will, in the end, boost mortgage rates to around 4.5 percent in 2016, which is higher but certainly not alarming, for the housing market.
 

RANK	STATE	NET NEW JOBS OVER 12 MONTHS	JOB GROWTH RATE
1	Idaho	25,300	3.8
2	Utah	47,700	3.5
3	Nevada	42,400	3.4
4	Florida	239,900	3.0
5	Washington	9,300	3.0
6	California	463,800	2.9
7	South Carolina	57,400	2.9
8	Oregon	46,600	2.7
9	Arizona	60,300	2.3
10	Georgia	96,900	2.3

Source: Bureau of Labor Statistics

Lawrence Yun is the chief economist for the National Association of Realtors®.

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