With a new year upon us, a lot has been said about the direction of the housing sector. Optimists, of course, have high hopes for the coming year, whereas pessimists are, well, more reserved. Nearly everyone with an opinion has said their peace, but where are things really headed? Is the housing sector actually improving, or are we seeing things through rose-colored glasses? The truth could be somewhere in between for all we know. In reality, we do not know exactly what is going to happen. However, it is possible to make educated guesses founded in historical data and trends.
For the most part, consumers tend to agree that the housing sector has made up considerable ground since the depths of the last recession. That much is not hard to see. However, what does the housing market have in store for 2015? Will we finally see the recovery gain the traction it so desperately needs?
Nearly a decade has passed since the housing bubbled peaked. And as surprising as it may seem, it has already been three years since home prices bottomed out. That said; we are a great deal removed from the “downturn.” However, the wake of the recession can still be felt in nearly every corner of the country. All the same, consumers believe that 2015 will provide the housing sector with an encouraging boost.
Now, more so than any other point during the recovery, consumers are excited about the direction of the housing market. According to a Trulia survey, nearly 75 percent of respondents acknowledged that the American Dream was not complete without the prospect of homeownership. Perhaps even more importantly, the idea of owning a home is now more realistic than ever for the millennial generation.
It wasn’t enough that millennials graduated from college during one of the worst recessions in American history: they were also subjected to incredibly strict mortgage underwritings, crippling student loan debt and insurmountable down payments. Each of these factors served to sideline an entire population from participating in the housing market. Fortunately, for the sake of the entire housing sector, it appears as if younger populations are ready to purchase a home now. The expansion of the economy has made it possible for many millennials to move from the renter pool to the buyer pool. Moreover, President Obama recently announced that the FHA would lower mortgage insurance premiums, as to facilitate more transactions. Some experts think that this move alone could add upwards of 140,000 new buyers to the market.
As a result, sellers should gain some leverage in the coming year; at least that is what consumers think. That is not to say that some obstacles won’t exist. It is still lofty to expect someone to be able to save up a down payment. Even with a Federal Housing Administration (FHA) loan, which requires considerably less down than traditional loans, it is hard to save money with the high costs of rent.
In addition to a potentially larger buyer pool, home values will play a large role in shaping the 2015 housing market. Despite the tapering of appreciation rates, experts believe that affordability will only get worse. While prices will continue to appreciate, the rate in which they are expected to do so will ease. That said; even at a reduced appreciation rate, home value increases should easily outpace income growth. As recently as 2013, incomes were the beneficiaries of a negligible 1.8 percent year-over-year increase. After adjusting for inflation, that number is almost discouraging (0.3%). On top of that, mortgage rates are expected to climb. By the end of the first quarter, the historically low interest rates we have come to expect should be nothing more than a nostalgic memory.
Not surprisingly, experts believe that the rental market will continue to exert its dominance over the middle class. In fact, not only will rental demand remain strong, but it will also gain a lot of supply. 2014 witnessed a particular boom in new apartment construction. And seeing as how it takes about a year to complete such a project, 2015 should see a lot of new apartment supply enter the market. The demand should meet the supply.
In the face of record-breaking rental statistics, single-family starts and new home sales are practically unnoticeable. While rents continue to surpass previous highs, single-family home starts and new home sales are not even half of where we would like to see them. This year should improve their standings, but not nearly as much as some would like to see. There simply isn’t enough demand for single-family homes. On the other hand, existing homes should see a bit more interest. Again, more millennials could enter the market, making existing homes their property of choice.
There are several markets that have demonstrated an increased propensity towards strong fundamentals. Each has exhibited an encouraging job growth and a low vacancy rate. That said; the following markets are poised to have a great 2015:
