Forecast: 2015 to be banner year for real estate

01/07/2015

Forecast: 2015 to be banner year for real estate

WASHINGTON – Jan. 5, 2015 – After a slowdown in the market this year, housing analysts and economists have high hopes for 2015. The real estate market is expected to build momentum across the board next year, mostly due to a strengthening economy.

Positive trends

Millennial force: Overall, employment is on the rise, but jobs for Millennials – particularly those aged 25 to 29, has risen by 3 percent – one percentage point above the nationwide rate. According to some forecasts, Millennials are expected to drive two-thirds of household formations over the next five years. The forecasted addition of 2.5 million jobs next year, as well as an increase in household formation, will likely drive more first-time homebuyers into homeownership, according to realtor.com projections.

Home prices stabilize: The double-digit price increases in 2013 have slowed, and stable growth was the trend in 2014. As investors retreated from the market, so have the rapid home price increases. Prices are expected to continue edging upward in 2015, with realtor.com predicting a 4.5 percent price gain.

"After two years of abnormally high levels of home-price appreciation in 2012 and 2013, price increases moderated throughout 2014," realtor.com notes in its 2014 Housing Review. "We are now experiencing increases in home prices consistent with long-term historical performance."

Mortgage rates rising: Interest rates over the past few months have been dipping below 4 percent, lowering the borrowing costs of homebuyers and refinancing homeowners. However, don't expect the low rates to stick around much longer. Mortgage rates are predicted to rise this year. Freddie Mac projects mortgage rates will likely average 4.6 percent but inch up to 5 percent by the end of 2015.

Return of the 3 percent downpayment: New programs with lower downpayments are popping up to help more buyers break into homeownership. In early December, Freddie Mac and Fannie Mae announced conventional loan downpayment programs that will allow qualified first-time buyers to secure a fixed-rate mortgage with a 3 percent down payment. Prior to that, they needed at least 5 percent.

Also, "there are many states as well as national programs, which offer grants that range from 1 to 5 percent to be used for a downpayment or closing costs," writes Damian Maldonado, co-founder of American Financing Corp., at CNBC. "These easing loan standards will allow more first-time buyers to enter the market."

Housing affordability declines: Affordability for homes, based on home-price appreciation and rising mortgage interest rates, will likely fall by 5 percent to 10 percent in 2015, according to realtor.com forecasts. However, the decline in affordability could be offset by an increase in salaries for many households. "When considering historical norms, housing affordability will continue to remain strong next year," realtor.com notes in its report.

New-home sales rebound: Single-family new-home starts barely budged in 2014 compared to 2013, and new-home sales remain far from normal levels. But that could finally turn around in 2015. New-home sales are expected to rise 25 percent as single-family construction picks up traction in 2015. The National Association of Realtors  projects single-family housing starts will rise to 820,000 in 2015, though that number is still below the 1 million historical average.

In the latest new-home report, sales dipped 1.6 percent in November, but builders remain optimistic. "As the labor market and broader economy continue to strengthen, we can expect the housing sector to gain momentum heading into next year," says David Crowe, chief economist for the National Association of Home Builders.

Foreclosures recede to pre-recession levels: The number of foreclosures is expected to continue to fall in 2015, but expect them to still be elevated in some pockets across the country – particularly in judicial states, such as Florida, where foreclosures must wind through the courts.

Foreclosure filings declined for much of 2014. From January through November, foreclosure filings fell about 172 percent compared to the same period one-year prior, according to RealtyTrac data.

The only uptick has been in foreclosure auctions, which are up 5 percent in November 2014, compared to one year earlier. Foreclosures will likely fall to pre-crisis levels in 2015, Blomquist predicts.

Drop in oil prices will boost housing: Oil prices have plunged 45 percent since June, which could inadvertently provide a lift to the housing market. "Households in the U.S. spend more than $1,800 on energy-related costs annually, and 22 percent of that energy consumption is due to residential real estate," according to CoreLogic's 2015 Housing Outlook. "So while the drop in oil prices typically has been linked to a reduction in driving-related expenses, it clearly also reduced energy-related expenses for residential real estate."

Rent rises to outpace home-value growth: An increase in rental costs in 2015 will likely outpace annual home-price gains. Expect the rental market to remain a "landlord's market" in 2015, with vacancy rates expected to stay below 5 percent, according to the NAR. That should lead to demand pushing rents up even higher and keeping them above inflation, notes NAR Chief Economist Lawrence Yun. Apartment rents are projected to increase 4 percent once 2014 numbers are released, and 4.1 percent in 2015.

Stronger economy leads to greater confidence: A stronger economy will likely increase housing demand in 2015. "Overall, the economy finally appears to be gaining enough momentum to help provide the support that the housing market (needs) for a stronger recovery," Sam Khater, deputy chief economist at CoreLogic, notes in the company's 2015 Housing Outlook. As proof, he cites the "combination of stronger employment growth and especially Millennial job growth."

"Moreover, the recent drop in oil prices cannot be overstated, because not only does it directly lower the transportation and home energy costs for households, but it also improves consumer confidence," Khater adds. "And confident consumers are more likely to spend money on big ticket items, which is sweet music to the ears of the real estate market."

Source: Melissa Dittmann Tracey, REALTOR® Magazine

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