Mortgage 101: The 2015 Housing Market Forecast

Posted by Laine Smith on 1/22/15 2:14 PM

Topics: Economy

According to Kiplinger.com, the housing market is slowing its pace as it starts to gain back some of the equity lost in the meltdown of 2006 to 2007. Over the past year, home prices rose in almost 90% of the 277 cities tracked by Clear Capital, a provider of real estate data and analysis and most metro areas are about where they should be. Kiplinger forecasts that home prices nationally will rise by 3.5% in 2015.  They also expect existing-home sales to increase 8% in 2015, and new-home sales to rise 25% in 2015.

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Image courtesy of Keller Williams

There are some major reasons to be optimistic for the outlook of 2015.  Here are some main areas that are going to affect housing this year:

First-Time Home Buyers

Now the housing market has begun to transition from one phase of recovery to the next. Homeowners who trade up don’t provide that growth because they usually swap one home for another. That leaves first-time buyers to propel growth.  Many young people who would normally fill the ranks of first-time home buyers were set back by the sluggish economic recovery, stalled income and student loan debt and were forced into moving back home or renting.

Where some young people enjoy renting, a recent survey by Fannie Mae showed 9 in 10 would prefer to own a home. They had been held back by tight lending standards that have made it tough to get around their heavy student debts and light savings.  In December, Fannie Mae and Freddie Mac announced programs that would allow first-time buyers to get homes with down payments of just 3 percent, instead of 5 percent, and relaxed credit standards that should allow more young people to buy homes.

The Census Bureau says that just 36 percent of Americans under age 35 own a home, the lowest since 1987, and as recently as 2007, that figure was 42 percent.  In an example from Kiplinger, a couple’s mortgage payment of $1,150 in Austin, TX, which included private mortgage insurance, was still less than the previous $1,200 a month they were paying in rent.  With rents still on the rise, and millennials getting sick of Mom's basement, it will likely entice more buyers to enter the market in the upcoming months.

Builders

In the past year, the supply of existing homes nationally was balanced between buyers and sellers, at about five months’ supply (the time it would take to sell the current inventory at the current pace of sales), and mostly favored sellers.   With few homes to choose from, buyers faced bidding wars and take-it-or-leave-it offers from sellers.  The key to more choices for buyers is new inventory, and it’s finally coming, albeit slowly.

Six years ago, homebuilders and Realtors were facing brutal business conditions: millions of Americans were losing their jobs and homes.  In 2014, however, construction of rental apartments and condos returned to pre-boom-and-bust levels. Employers are hiring again, material shortages and price spikes have eased, but skilled labor and buildable land are still sparse.  Construction of single-family homes has made it just halfway back to the normal annual average of 1.3 million starts, says Robert Denk, an economist with the National Association of Home Builders, so there is still a strong demand for new home builds.

Economy Status

As 2015 begins, hiring is strong and economic indicators are pointing up.  When companies are hiring, would-be homebuyers feel more confident about taking on mortgage debt.  During the recession, companies kept slashing positions, sending the unemployment rate soaring to 10 percent and frightening potential homebuyers. But job growth has been strong lately, with employers adding 321,000 jobs in November. The unemployment rate has tumbled to 5.8 percent.

From January to October, home prices rose 4.5 percent nationally, according to the latest S&P/Case Shiller Home Price Index. That gain was subdued compared with October 2013, when home prices jumped 11 percent higher than the previous year.  The number of U.S. homes somewhere in the foreclosure process fell in September to the lowest level since before the bust but a lot of homeowners are still underwater, meaning that they owe more on their mortgage than their home is worth.

But slower price appreciation in 2014 may have set the stage for a buying surge in 2015. That's because buyers need the right combination of steady income, decent savings, low interest rates and reasonable home prices to jump into the market.  The decelerating growth in home prices may be creating an affordability opportunity that will attract buyers in early 2015.

According to NPR, The Federal Reserve, headed by Janet Yellen, is expected to begin raising interest rates later this year.  Industry economists generally expect mortgage rates to reach 5 percent by year's end. That would still be quite low by historical standards, but after having such cheap mortgages for so long, buyers need to be prepared for them to go up this year.

For more information on homebuying, refer to our Mortgage 101 Handbook or contact one of our mortgage bankers.

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