With the New Year approaching, consumers, investors, industry experts, and policy makers alike all cast a critical eye toward the 2015 real estate market. 2015 marks nine years since the housing bubble peaked before crashing, and three years after home prices hit a record low post-recession. This recovery has been a slow one, and 2015 will continue the trend of slow growth, but the market is creeping closer and closer to robust health.
Mortgage Rates will creep back up
The sluggishness of the economy kept mortgage rates low since the housing bubble burst. Rates were on a steady downward climb since 2008. 30-year fixed mortgage rates have stayed below 5% since the middle of 2011, and actually went down further in 2014. The current average rate is 3.66% and we are likely to see a rise in that rate during 2015. Realtor.com economist Jonathan Smoke suggests we’ll see a rise in the middle of the year, slightly preceding The Federal Reserve decision to increase the federal funds rate. Exact predictions vary, but general consensus says we’ll see rates hover just under 5% for the majority in the year, with mortgage rates possibly passing the 5% marker by the very end of 2015, setting us up for a stronger market in 2016.
Older Millennials will begin to leave the nest (and their rentals)
There is a lot of speculation over when Millennial buying power will take the wheel of the housing market, and so far this cohort has either resisted or been unable to buy homes. Millennials, born between 1981-2000 are the largest cohort in the U.S., besting the Baby Boomer population by 4 million. The oldest Millennials are entering their early 30s and beginning to shed some of the fear of the economic future that came with graduating during the worst economic period since the Great Depression. The job market hit Millennials the hardest, sending record numbers back to their parents’ homes, but this past year’s job growth puts the oldest of this cohort in a place to plan for the future. If job growth continues into 2015, Millennials may begin to buy in numbers that register in other economic metrics. However, with record high levels of student loan debt and a preference for living in urban centers where job prospects are best, Millennial home buying will likely begin in emerging markets in the South and the MIdwest, where prices are slightly undervalued and still affordable for young households without a lot of capital.
Construction rates will increase
Housing starts were very low in 2014, barely topping 1 million. New construction was dominated by multi-family buildings in response to the growing demand for more housing in tight urban markets like Dallas and San Francisco where job markets are strong and young renters plentiful. Seeking stable employment and opportunities to grow their careers, Millennials tend to be clustered in dense urban areas where new housing is difficult and expensive to build. Because of the population shift from suburban to urban areas, single-family construction has all but stopped completely in the past few years, a situation the U.S. hasn’t faced since the Great Depression. The vacancy rate for single-family homes is near it’s recession high at 10.7%. New construction is expected to pick up in 2015 as the housing market supply grows slim, but more households are formed by Millennials. The exact location is new starts is hard to predict because of the Millennial Mismatch, a phrase coined by Trulia chief economist Jed Kolko, describing the millennials preference for urban dwelling in highly developed areas. where new starts are difficult to impossible.
Mortgage qualification standards could relax…or not?
Following the sub-prime mortgage crisis, mortgage qualification standards have been tight, keeping first-time home ownership out of reach for many. These standards won’t relax overnight, but policy initiatives outlined by the Federal Reserve this summer could open up paths to home ownership for first time owners as well as households that lost their homes during the recession. In order to bolster loan applications, it’s possible that lenders could allow higher debt-to-income ratios and/or lower credit scores. Don’t expect too much leeway however, as the slow recovery will continue to creep along until confidence in the market returns.
