- January 22, 2015
- Posted by: AGreer
- Category: Market Conditions
After Damien and Tina Bucci were approved for a mortgage in 2012, they decided they couldn’t afford the biggest purchase of their lives without greater confidence in the U.S. economy. Next month, they will close on their first home — a four-bedroom Colonial with a half-acre yard.
“We could have made it work two years ago but it would have stretched our budget too thin,” said Damien Bucci, 30, from the kitchen of his two-bedroom apartment in a 238-unit development in Fairless Hills, Pennsylvania. “Financially, we’re in a lot better position now.”
The Buccis have been shut out of the housing market since its rebound in 2012 from the biggest collapse since the end of World War II and now are belatedly part of its recovery. They will benefit from faster economic growth and a labor market that’s approaching what the Federal Reserve calls “full employment,” meaning anyone who wants a job has one. An increase in first-time buyers, whose market share dropped to a record low last year, will provide a boost to the sluggish mortgage industry.
“Credit tightness has been an issue for the housing market but demand weakness has been a bigger one,” said Douglas Duncan, chief economist at mortgage giant Fannie Mae in Washington. “The improving economy is going to put renters in a better place to buy.”
Duncan predicts a 6.3 percent increase in mortgage lending for purchases this year after a drop of 9.6 percent in 2014. He said increasing confidence in the job market is the strongest indicator home sales will improve.
The Thomson Reuters/University of Michigan consumer sentiment poll showed last month that consumers expect an increase of 1.7 percent in their incomes in 2015, the highest since 2008. Those under 45-years-old expect the biggest gain, at 4.7 percent.
“Young renters have wanted to keep their living situations flexible because they didn’t know if they were going to have to move for a job,” Duncan said. “More of them are going to be willing to put down roots if they feel more confident in the labor market.”
Economic growth, bolstered by consumer spending and business investment, is accelerating. The U.S. grew at a blistering pace of 5 percent in the third quarter, the fastest since 2003, the Commerce Department said at the end of December. The Fed said last month it expects the economy will expand between 2.6 percent and 3 percent in 2015, up from 2.3 percent to 2.4 percent in 2014.
The economy added more than 2.7 million jobs last year, the most since 1999, according to the Bureau of Labor Statistics. The jobless rate will average 5.2 percent to 5.3 percent, levels last seen before the financial crisis, according to the Fed.
“With the labor market firming, wages are starting to accelerate,” said Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago and chairwoman of the Securities Industry and Financial Markets Association’s Economic Advisory Roundtable. “Companies are finding themselves having to compete for workers, and then compete to retain them.”
The median household income in 2014 rose 1.6 percent to $53,880 through November, according to Sentier Research LLC. That pace should continue into 2015, said Swonk. For all of 2013, the gain was 0.1 percent.
“People who see their cash flow go up are going to feel a lot more confident about making a home purchase,” Swonk said.
Young Americans are making more money as technology companies ratchet up spending and hire. Business investment in intellectual property, which includes software and computer programming, accounted for 0.34 percent of the economy in the third quarter, up from 0.11 percent in the year earlier period, according to inflation-adjusted data from the Bureau of Economic Analysis.
The median age of employees is 28 at Facebook Inc., 30 at Google Inc. and 31 at Apple Inc., according to a study last month by PayScale Inc., a company that sells compensation software. Facebook hired about 2,000 workers last year through September, up from 1,175 in the year-earlier period. Google added about 7,300 positions in the first nine months of 2014 and Apple hired about 12,300 employees, according to regulatory filings.
Younger workers were the worse-hit during the recession. The unemployment rate peaked in 2009 at 10.6 percent for people aged 25 to 34 years and 9 percent for ages 35 to 44.
In November, the unemployment rate for people 25 to 34 years old was 6.1 percent, the lowest since 2008. For the 35 to 44 age group, it was 4.3 percent, matching the September level that was the lowest since 2008.
The Buccis, who have a three-year-old daughter and a six-month old son, decided last year that their financial situation had improved enough for them to buy a home. Damien is a high school teacher and Tina cares full-time for the couple’s two children. They are paying $310,000 for their house in Chalfont, Pennsylvania, about 30 miles north of Philadelphia.
“We’ve been living on a budget and saving money, so we’re in a better place financially than we were two years ago,” Tina, 29, said. “Our goal was to be out of the apartment before our second child started walking, and we’re going to make it.”
Sales of new and existing homes this year probably will gain 5.4 percent to 5.7 million after falling 2.7 percent in 2014, according to Fannie Mae’s Duncan. Lending for home purchases probably will grow to $714 billion from $672 billion last year, he said.
Household formation, a key measure of real estate demand, will rise to 1.1 million in 2015, the highest in three years, according to a forecast by IHS Global Insight Inc. First-time buyers accounted for about 29 percent of home purchases last year, according to data through November from the National Association of Realtors.
“If the first-time buyers aren’t in the market, the sellers can’t move up and buy their next houses,” said Bill Banfield, vice president of Quicken Loans Inc. in Detroit, the third-largest U.S. lender. “The real estate market needs an increase in entry-level demand” for it to be fully functioning, he said.
Ricardo Bonafe, 37, plans to buy his first home this year. He said he’s in the final stages of the hiring process for a job as a correctional facilities officer. The pay will be better than his current job as a roofing contractor, and the work will be more reliable, said Bonafe, who lives on the northwest side of Chicago.
“The last few years have been tough ones for me and my family, but it looks like things have finally started to turn around for us,” said Bonafe, who lost an information technology position at a non-profit group four years ago.
Bonafe, his wife, Judy, and their two children have been living at a friend’s house, paying rent as they save money for a down payment. The couple said they plan to start looking at properties priced at about $250,000 this month.
For Bonafe’s 12-year-old daughter, Trinity, the real measure of the economy is whether she has to continue sharing space with her 10-year-old brother. If Bonafe’s plans for the New Year materialize, she’ll have a room of her own.
“I grew up in a home my family owned, here in Chicago, and I want to give them that same experience,” Bonafe said.