Here’s What’s in Store for the Mortgage Market in 2016

Although the housing market is expected to see slower growth in 2016, the industry is expected to continue on the path to recovery as the market expands and more households are formed.

Bank of America Merrill Lynch Global Research recently released its outlook for the markets in 2016. According to the data, 2016 will be a year of modest global and economic growth.

In addition, emerging markets will begin to recover slowly and single-digit stock returns will be led by high-quality cyclicals.

Bank of America reported that the road to recovery for the U.S. housing market is expected to continue in 2016. New household formations (housing starts) are expected to reach 1.275 million. Exiting home sales could increase by 5 percent, while new home sales could experience a 10 percent growth rate.

The report also noted that home price appreciation could slow in 2016, with prices only rising by 1 percent, as overvaluation becomes more prevalent in the market compared to income.

The highly anticipated interest rate hike from the Fed may interfere with the housing recovery, but the research shows that "the Fed’s go-slow approach should prevent a painful rise in mortgage rates."

Over the long-term, the research found signs of the market leaning toward renting over homeownership, which could produce an increase in multi-family housing construction.

Other highlights from the Bank of America Report include:

• Modest U.S. and global economic growth. Global GDP is forecast to grow by 3.4 percent, up from 3.1 percent in 2015, which is slightly below trend. Growth of about 0.5 percent faster than trend is forecast for Europe, the U.S. and Japan. In the U.S., GDP growth is expected to remain steady at 2.5 percent next year as a solid labor market offsets weak productivity growth.

• Gentle rise in inflation. Globally, headline inflation is expected to inch up to 2.8 percent as the effects of commodities price drops begin to fade. Underlying inflation should remain stable, with key differences between developed and emerging markets. By year-end, U.S. unemployment should reach 4.5 percent, causing a gentle rise in inflation next year, including wage and price inflation at 0.5 percent and 0.2 percent respectively. Emerging market inflation could decelerate to 3.8 percent, down from 4.3 percent in 2015.

• Start of emerging markets recovery. For the first time since 2010, average annual growth in emerging markets should begin rising to 4.3 percent in 2016 from 4.0 percent in 2015. Excluding China, growth should pick up to 3.1 percent in 2016 from 2.6 percent in 2015. About three-quarters of emerging market economies could show signs of recovery by the middle of 2016, whereas Brazil could contract further to -3.5 percent as it struggles to climb out of recession. Investment likely will become the key driver of the emerging market recovery.

• Interest rates: up from zero. The Federal Reserve is expected to carefully calibrate a rate hike over the next two years, with a 0.25 percent hike this month and three or four 0.25 percent increases in each of the next two years.The confluence of modestly higher rates, a Fed liftoff, and more regulatory pressures will likely keep liquidity risks in bond markets at the forefront.

“We’re seeing an aging bull market with a lot of upside potential in it, but also the beginning of slow, steady growth in the capital markets and innovation-led shifts in business cycle,” said Candace Browning, head of BofA Merrill Lynch Global Research. “The greatest opportunities for investors may be found among carefully selected, healthy dividend-paying stocks and thematic investments in innovators reshaping market dynamics over the next decade.”

Click here to view the full report.