From Wells Fargo Economics Group

Even though 2014 proved to be a disappointing year for home sales and new single-family construction, there are several reasons to be optimistic about the housing sector in the New Year.

• Most importantly, job growth has improved to the point that household formations are rising again.

• State-to-state migration has also improved, reflecting more boomers moving into retirement and an increase in corporate relocations.

• Mortgage rates have also come back down, with the rate on conventional 30-year fixed mortgages falling below four percent.

• When coupled with easing credit standards and more moderate gains in home prices, the pieces all appear to be in place for a more meaningful recovery in home sales.

We have slightly raised our forecast for 2015, reflecting stronger household formations.

We recognize that we may be a little ahead of the pack in raising our outlook, even if it is only slightly. Most of the housing data ended 2014 on a soft note and finding bright spots in the single-family market are still much more the exception than the rule. The clearest areas of improvement have been in clearing the excesses from the prior decade’s boom years.

• The overhang of foreclosures has largely been cleared.

• Vacancy rates for rental properties and for-sale housing have fallen back to their historical norms and home prices have rebounded to the point that just 10.3 percent of homeowners with a mortgage owe more on their mortgage than their home is worth, down from a peak of 26 percent in 2009.

• Supplies of homes are actually tight in markets where jobs are growing rapidly.

The absence of negatives is comforting but what the housing market has really been missing is some sort of positive catalyst. That positive catalyst may finally be taking shape in the form of stronger job and income growth. Employers added a monthly average of 246,000 jobs in 2014, marking the strongest growth in 15 years. Not only has the pace of overall job growth improved but the breadth of the increases has improved considerably across industries and metropolitan areas.

Considerable Underlying Support Is Now in Place

With 3.0 million net new jobs added in 2014 and the unemployment rate falling to 5.6 percent, there has finally been enough improvement in the labor market that we now believe that there is significant support in place to generate a self-sustaining rebound in for-sale housing.

We noted in earlier reports that the number of full-time jobs is still some 1.7 million below its pre-recession level. The mix of jobs has improved, however, with a larger proportion of jobs created during the past year being full-time rather than part-time.

With employment conditions improving, we are finally beginning to see an increase in household formations. We published a report on this earlier this week and noted that the pace of household formation appears to have picked up to 1.2 million households in 2014 and appears set to rise to 1.5 million in 2015.

The rise in household formations has cut into housing vacancy rates and kept inventories of unsold homes near record lows. Total housing starts in 2014 were just around 1.0 million units, so inventories will likely tighten even further next year even if construction picks up significantly from current levels.

From a purely fundamental standpoint, 2015 looks like it will be a great time to buy a home.

• After recovering much of their losses, home price appreciation has moderated in recent months as investor buyers have pulled back from the market.

• Mortgage rates have fallen and credit standards continue to loosen up on an overall basis. The latest Federal Reserve Senior Lending Officers Survey shows that lenders are easing underwriting criteria modestly for prime mortgage borrowers.

The FHA has also recently lowered down payment requirements for purchasing homes with FHA loans and the Obama Administration has just announced plans to reduce mortgage insurance premiums for FHA loans by 50 basis points.

These moves should provide some incremental support to home sales this year and may boost first-time home purchases, particularly since these changes are being enacted at a time that housing demand is already likely to see some positive momentum.

The apartment market has been strong for quite a while, with some 260,000 units delivered over the past year and another 453,000 currently under development. The apartment boom has received a great deal of attention because it is so visible and plays into one of the most widely watched themes of this decade, the emergence of the Millennial generation.

This generation, which largely came of age during the housing bust and the rising use of mobile devices, is widely believed to put a high premium on mobility and desires to live closer to the center city or near key transit hubs. Transit-oriented development has been one of the clear winners during what has been a disappointing past few years for housing.

With the leading edge of the Millennials now in their mid-thirties, more are coming to the point in their lives that they are forming families and looking to buy homes. We expect to see multi-family development shift more toward townhome and condominium development but still hold on to its transit-oriented, city-centric growth model.