Housing was the highest hope for economists at the beginning of last year, and the greatest disappointment at the end of the year. 2015 should be a much better year for construction, but price appreciation probably won’t be any higher than last year.

Last year’s housing starts increased by 8.7 percent from 2013, not as strong as the past years’ gains, but hey, a gain is a gain. Home prices were up between five and six percent on average (based on extrapolation of the first three quarters of this year).

For the housing forecast, I look at underlying demand and credit issues. Keep in mind that “housing” includes single family homes, apartments, condominiums and manufactured housing.

Underlying Housing Demand

Population keeps growing, generating demand for new housing units. But population growth is fairly stable from year to year, far more than growth in the number of households. (A household is the people living in one housing unit; they may be a family or unrelated.) For example, the peak growth rate for population in the past decade was 2007 with 0.99 percent gain. The peak gain in households was 2.03 percent in 2011. Increases in 2009 and 2010 were tiny, as the recession prevented many people from living by themselves. Come the recovery, young adults moved out of their parents’ basements, people in apartments could live without roommates, and couples who were not getting along could afford divorce. Thus, the key to housing demand in the short term is employment. When jobs are more plentiful, people are more likely to live by themselves. (Partially offsetting this trend is the tendency toward marriage and birth in better economic times.)

Job growth has run 2.1 percent over the past 12 months, which amounts to nearly three million jobs. This increase, along with two percent wage gains on average, puts more people in position to buy or rent their own homes.

Financial Costs of Housing

Two financing considerations will also influence housing. On the demand side, I project mortgage rates to rise by almost a full percentage point over the course of 2015. That’s not as bad as it sounds. It is common for housing starts to continue to rise even after mortgage rates rise. That’s because interest rates are not an outside force, but a result of the supply and demand for credit. In a stronger economy, the demand for credit grows faster than the supply of savings. Federal Reserve policy reinforces this pattern, because the Fed tightens when the economy is strong, not weak. Interest rates are both a detriment to housing affordability and also a sign of the economic strength that help affordability.

We have experienced rising mortgage interest rates along with increased housing starts a number of times: In the late 1970s, in the second half of 1983, in 1999 and from about 2003 through 2005. However, when mortgage rates rise enough, housing starts are choked off.

In today’s situation, job growth will be more important than housing starts for two years, plus or minus. If, as I suspect, mortgage rates rise for more than two years, and by more than two percentage points, then look for housing starts to drop. However, starts could end up higher than they are now. In several periods of rising mortgage rates, housing starts showed an inverted V shape: first rising for a period, then declining. In several cases, they ended up about where they had started, sometimes higher and sometimes lower.

On the housing supply side is the question of whether real estate developers can get the credit they need for construction. Credit is certainly tighter now than a decade ago, as we headed into the housing boom. However, banks are slightly easing their credit standards for commercial real estate, according to the Federal Reserve survey of senior loan officers. In my conversations with bankers, they frequently say that other banks are easing credit standards; the bankers that I talk to never admit that they themselves are easing standards. I conclude that credit will be adequate for moderate increases in real estate construction.

What of housing prices? Strengthening demand for housing will drive not only starts but also prices. However, increased supply will limit the gain in home prices. Don’t look for more than the six percent gain that homeowners enjoyed last year.

Another Housing Bubble?

Finally, I’m often asked if we are in another housing bubble. That people are worried about it is comforting. If nobody were worried about another bubble, that would be a risk factor for a bubble! Looking at underlying demand, I’m comfortable that this is not a bubble, so long as we are only talking about one or two years of strong growth. If the growth rate gets significantly stronger, and prices rise at a double-digit pace, then I would worry. The one factor that does concern me right now is hearing a radio ad for a seminar on how to make zillions of dollars flipping houses. That’s scary.