Reading opinion articles about the future of the housing market is always interesting. On the one hand, some people argue that home prices will peak in 2016, so investors should be wary. Meanwhile others claim that the market won’t reverse itself quite yet, and will continue to grow until at least 2019.
So who’s right? What can we expect in the next 12 months? Well even though some things are difficult to predict, there are a few (almost) certainties.
Interest Rates Will Rise
Thanks to the Fed’s interest rate hike, we can expect to see mortgage interest rates increase as well. While this may seem like good news for the bank, the negative consequences may outweigh the positives.
Higher mortgage rates means higher monthly payments for home buyers. To offset this issue, potential buyers may decide to go for a smaller, more affordable loan or just not buy at all. If they do decide to move ahead and purchase, those looking to buy a new home will be happy to know that construction is largely becoming more focused on affordability than luxury. Smaller homes (including townhomes) are definitely the craze.
But there’s still a small problem…
Home Prices Will Probably Keep Increasing
Most experts agree that the market hasn’t reached its peak quite yet. Sure, there has been massive growth over the last few years, but homes are still valued lower than they were prior to the recession. Even though there’s no guarantee they’ll reach those levels again, it is likely due to the strengthening economy.
Unfortunately, increasing home prices and interest rates lead up to the perfect storm for buyers. Incomes are not increasing at the same speed as home prices, meaning it will become harder to buy in 2016 compared to this past year.
Buying Makes More Sense than Renting…for Now
Right now, there are hundreds of thousands of renters looking to buy. Some of these people lost their homes during the recession, while others are looking for their first home. Both groups have realized that it just doesn’t make sense to keep paying rent if they can actually have a lower monthly payment by purchasing a home right now.
This is especially true considering the rising prices of renting. Most landlords are beginning to raise rates to help counter the decreasing number of renters.
But keep in mind that this is always changing. As homes become more expensive and mortgage rates go up, it will be more difficult for people to get the loan they want. Renting will probably be more attractive than buying by the end of 2016.
While there are general trends across the country in real estate, there are always small pockets that do better or worse than others. Cities such as Denver and Dallas where inventory has been short will be hot compared to struggling areas such as Boise and Salt Lake City. Several factors including unemployment, local laws, population growth, and the recent housing trends in these cities are major factors in what will happen.
Things Will Return to “Normal”
At the end of the day- the housing market will get “back to normal” next year. This rapid 5% annual growth isn’t likely to occur again- instead, the growth will likely be closer to 2-3% each year.
The choice between renting and buying will be more difficult, as new homes are being built inexpensively but the loan to purchase them will have higher rates than the last 6 years. And even though millennials are coming of age to seriously consider buying their first home, they are also getting married and having kids much later in life than their parents and grandparents. They may choose to wait until the next downturn to make sure they buy their homes at the bottom instead of the peak.