More housing units are being occupied, and that dictates a strengthening market in 2016. Higher mortgage rates will eventually take their toll, but we’re 18 to 24 months away from that. In 2016 and 2017, housing construction will increase and home prices will rise.

The number of housing units actually occupied has increased by two million units over the past four quarters (which I highlighted in my recent economics newsletter, free to my best friends). We only built 1.1 million new units, so the additional 900,000 units occupied came from previously-vacant housing.

Housing Occupancy

The housing occupancy data (Table 8) come from a survey that isn’t perfect, but it’s good enough to tell us that we are underbuilding housing right now. The new occupancy comes partly from population growth, but that only accounts for half the increased demand. The other half comes from adult children moving out of their parents’ basements, singles living without roommates now, and couples getting divorced. This pool of people setting up new households isn’t large enough for many years of growth, but it’s good enough for a year or two.
Mortgage interest rates will rise, partly due to the Federal Reserve’s tightening and partly because global demand for credit will increase faster than global supply of savings. Historical patterns show that in the first and sometimes second year of rising mortgage rates, housing starts continue to rise, fueled by strong economic growth. Eventually, though, higher interest rates prevent further improvement in the housing market, and sometimes a contraction. So long as new construction isn’t overdone in 2016, I expect a leveling off in late 2017 and 2018, not an outright decline.

Home prices should reflect this trend: up for 18 to 24 months, then flat for a year or two.

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