New homes under construction in Carlsbad. REUTERS / Mike Blake

By Matthew Gardner

The outlook for the U.S. and San Diego economies is pretty good overall, with few surprises and significant upside potential for housing. Here are ten predictions for 2015:

1. The U.S. Economy Will Continue to Expand with Real GDP Growth of 2.3 Percent in 2016

Although a positive number, the forecasted rate of growth suggests that we will be modestly under-performing in 2016. On a positive note, oil prices are likely to remain well below long-term averages, which puts more money into consumers’ pockets in terms of disposable income. However, I believe that consumers are likely to continue to save rather than spend which will constrain growth. That said, there is certainly no recession on the horizon — at least not yet — and a strong dollar will act as a bit of an anchor.

2. Employment Will Continue to Expand But the Rate of Growth Will Slow. Look for an Increase of 1.6 Percent in 2016

We are rapidly approaching full employment (generally considered to be when the unemployment rate drops below 5 percent). As such, growth in employment has to be driven more by population growth rather than a return to employment. 2015 saw an average of around 210,000 jobs created per month and I believe that this is likely to slow to an average monthly gain of 190,000 new jobs.

In San Diego I expect to see employment growth at a rate which is substantially above the national average — in fact I expect almost all major West Coast states to grow at a fairly brisk pace. Look for the local market to expand employment by 2.6 percent in 2016.

Matthew Gardner

3. The U.S. Unemployment Rate Will Continue to Drop and End 2016 at 4.8 Percent

As mentioned above, we are heading toward full employment and, as such, the national unemployment rate cannot trend much lower. That said, the less acknowledged U-6 rate (which includes those working part-time and those marginally attached to the workforce) will remain elevated at around 8 percent, signifying that there is still some slack in the economy and room for the rate to drop a little further.

I am looking for the same to apply in San Diego with the unemployment rate falling to 4.4 percent by the end of 2016.

4. Inflation Will Remain in Check With The Consumer Price Index at 1.9 Percent

The Federal Reserve has begun the long-awaited tightening of monetary policy and we will likely see the Fed Funds Rate continue to move higher over the next two years. Inflation has yet to respond to the low unemployment rate, but it will.

The core rate of inflation should remain in check and the overall rate could stay below long-term averages as a function of stubbornly low energy costs. Should we see a shift in OPEC’s position relative to oil supply, the overall rate of inflation could rise more rapidly. Oil prices, therefore, will remain in focus during 2016.

5. Mortgage Rates Will Rise, But We Will Still End 2016 with The Average 30-Year Fixed Rate Below 5 Percent

I am taking the Fed at its word when it says that monetary tightening in 2016 will be gradual and heavily data dependent. Accordingly, I expect only a modest uptick in long-term rates in 2016. Furthermore, as long as the Federal Reserve continues to reinvest the dividends that it is receiving from their bond holdings — which is highly likely — the yield on the key 10-year Treasury will remain low and hold mortgage rates in check. This is only likely to change after the general election, therefore suggesting that rates will remain very attractive relative to their long-term averages.

6. Credit Quality—Which Had Been Remarkably Stringent—Will Relax a Little

Access to credit, specifically mortgage instruments, has not been easy for many would-be home buyers, but that is set to change. I believe that we will see some improvement, specifically for borrowers with “near-prime” credit. This will be of some assistance to first-time buyers; however, credit quality will still be higher than it needs to be.

7. Existing Home Sales Will Rise Modestly to an Annual Rate of 5.53 Million Units with Existing Home Prices up by 4.7 Percent

I anticipate that we will see some improvement in overall transactional velocities in 2016, but unfortunately, demand will still exceed supply. Prices will continue to rise, but at a more constrained pace than seen over the past few years. This will be a function of modestly rising interest rates as well as slightly improving levels of inventory. I anticipate that we will see more listings come online as more households return to positions of positive equity in their homes.

In San Diego, housing affordability continues to be a concern. In the coming year, I expect that demand will still usurp supply, and because of this, prices are likely to rise by around 5.9 percent in 2016.

8. New Home Sales Will Jump and Be One of The Biggest Stories of 2016. Look for a 23 Percent Increase in Sales and Prices Rising by 3.4 Percent

I believe that builders will start to build for the entry-level buyer, filling a huge void. Additionally, I see the total number of new home starts increasing quite dramatically in 2016 as banks start to ease lending and builders start to believe that the downward trend in home ownership has come to an end. This will help to absorb some of the pent-up demand currently in the market.

Housing starts in the San Diego area will continue to grow. I’m forecasting 4,000 single family starts in 2016 — anything less will be disappointing given the preponderance of latent demand in the marketplace.

9. Foreclosures Will Continue to Trend Down to “Pre-Bubble” Averages

Any story regarding foreclosures will be a non-story as the rate will continue to trend down toward historic averages. However, we will see the occasional uptick as banks work their way through their existing inventory of foreclosed homes. Move along; there’s nothing to see here.

10. The Millennials Will Start to Enter the Market

There are several substantial reasons to expect an increase in Millennial buyers. Firstly, early Millennials are getting older and starting to settle down, and even with modestly higher mortgage rates, rents are likely to continue to trend upward, and this will pull many into home ownership.

Secondly, more favorable mortgage insurance premiums, additional supply from downsizing boomers, and growing confidence in the housing market will lead to palpable growth in demand from this important — and substantial — demographic.

To conclude, it appears to me that 2016 will be a year of few surprises — at least until the general election! Because it is an election year, I do not expect to see any significant governmental moves that would have major impacts on the U.S. economy or the housing market.


Matthew Gardner is chief economist at Windermere Real Estate and chair of the Washington Center for Real Estate Research at the University of Washington.

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