2016 Housing Market Forecast: 7 Trends the Experts Are Predicting

Posted by Laine Smith on 12/30/15 3:33 PM

Topics: Economy

2015 has been deemed “the housing market’s best year since the recession”. Following a year of significant home price gains, the Fed’s decision to increase the federal funds rate, and skyrocketing rental prices, here are seven trends housing market and economic experts are projecting for 2016.

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Mortgage interest rates will increase.

There is a general consensus among all entities that predict mortgage rates – Fannie Mae, Freddie Mac, MBA and NAR – that mortgage rates will move up each quarter in 2016, possibly rising one-half percentage point between now and the end of 2016, according to CoreLogic.

Even though a half percentage point boost in mortgage rates still keeps rates near their historic lows, it could decrease mortgage eligibility and home affordability for some prospective homebuyers, especially lower-income and first-time homebuyers.

Home prices will continue to rise.

In 2015, more than a third of the nation’s major metro areas saw home prices reach all-time highs, according to a recent report from RealtyTrac. The CoreLogic Home Price Index rose approximately 6 percent over the last 12 months, and as long as positive economic conditions prevail, they’re predicting 2016 home prices will appreciate another 5.2% nationwide.

Though increasing home prices dictate a strengthening housing market, rising prices coupled with increased interest rates could shut out some homebuyers. The predicted slowdown in 2016 could help some homebuyers who have been outpaced by rising prices.

Rental prices will outpace income gains and inflation.

Nearly half of all renter households were considered “cost-burdened” in 2015, meaning they are spending more than 30 percent of their incomes on rent, according to the Harvard Joint Center for Housing Studies.

While labor markets have seen improvement, renter incomes have not yet recovered from the recession. In fact, the median renter income has declined by 9% since 2001.

While inflation remains tame, rental costs increased 3.6% compared to a year ago in November, according to the U.S. Labor Department. The CPI report showed real wage growth was up only 1.8% compared to a year ago in November.

Zillow predicts rents will soar to their highest medians on record in the new year.

More Millennials will buy in 2016.

The Millennials are the largest generation in the U.S., making up one-third of the nation’s population in 2013. Members of this age group (anyone between the ages of 18 to 35 in 2015) are getting married and starting families later than their predecessors…and buying homes at a later age. But now with a large amount of older Millennials reaching the average first-time homebuyer age (33), some experts are predicting an uptick in Millennial homebuyers in 2016.

Millennials will buy one out of three homes in 2016, predicts Jonathan Smoke, Realtor.com Chief Economist.

New construction will see significant gains in 2016.

The latest new home sales report was positive for November 2015, showing an increase of 4.3% thanks to rising construction and a boosted new home supply. Currently, the new home supply is at 5.7 months. A balanced market typically has a 6-month supply.

Housing starts rebounded in November from a seven-month low and permits surged to a five-month high. With permits gaining ground on starts, home building is likely to remain supported in the months ahead, according to Reuters.

Realtor.com’s 2016 Housing Forecast predicts new construction will drive home sales to the highest level since 2006.

Existing home inventory is a toss-up.

Likely the biggest risk to the health of the 2016 housing market is the existing home inventory shortage. Existing home sales plateaued this fall according to the most recent pending home sales report from the National Association of Realtors. They attribute the drop in sales to a decrease in inventory, especially in the affordable price segment of the market.

National Association of Realtors Chief Economist Lawrence Yun remains optimistic for existing home sales in 2016 but predicts sales to increase at a more moderate pace than the booming market of 2015. In Yun’s housing and economic forecast, he said pent-up sellers will realize the amount of equity they have in their current homes and use it towards their next home purchase, opening up more affordable starter homes for the younger generations entering the market.

Homebuyers, especially first-timers, will search for suburban housing.

The availability of affordable homes will determine 2016 housing market trends, according to Zillow’s 2016 Housing Market Predictions. Zillow is predicting that buyers will move (or relocate, for repeat homebuyers) toward “amenity-rich suburbs” or mini-cities in order to find affordable homes for sale as prices outpace wage growth in larger metros.

Regardless, there is no time like the present to get off the homebuying fence as price continue to increase and mortgage rates are predicted to inch away from their historic lows. The best way to prepare to buy a home in 2016 is to meet with a mortgage banker for a pre-approval to determine your options, eligiblity and affordability for purchasing a home.

For more information about buying and financing your first home, download our free Mortgage 101 Handbook for everything you need to know about home financing options, mortgage lingo and the loan process.

Download: Mortgage 101 Handbook

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