By now you’ve probably heard that 2015 is expected to be a pretty good year for real estate. It’s a prediction that we chief economists are all fairly aligned on.
But what I can’t emphasize enough is why I’m so confident this is a defining year for the housing industry.
It comes down to three simple factors:
Home sales will increase.
Prices will increase.
Mortgage rates will increase.
When combined, those three indicators point to an extremely strong real estate market. And potential home buyers should move fast if they want to spend less.
Buy before it’s too late
Buyers should act now––delayed purchases will only result in higher monthly mortgage payments as prices and rates rise. In fact, our forecast data show affordability may decline as much as 10% over the course of the year.
Plus, we won’t get another head fake on mortgage rates like we did in 2014. The economy is much stronger now, and the Federal Reserve continues to communicate loudly to the financial markets that it will raise the target for the federal funds rate this year.
Right now, the Fed is using the word “patient” to describe its approach to picking the time to raise the target rate.
However, when the Fed “loses patience,” rates will go up at least 20 to 40 basis points in anticipation of the target rate officially going up.
The last time the word “patient” disappeared from the Fed’s language, it raised the target two months later. And when “patient” disappeared from the Fed’s language, mortgage rates went up in anticipation of the official move.
So, buyers beware: The clock on these low mortgage rates may be ticking.
Job growth, global economy will boost housing
From a macro level, the economy and the housing market are in far better shape now than a year ago. We are creating jobs at a pace now that we haven’t seen in 15 years.
Friday’s initial report on fourth-quarter GDP came in at 2.6% growth. Underneath the number was mounting evidence that consumer spending is indeed strong and wage growth is finally accelerating.
Low prices at U.S. gas pumps have turbocharged consumer confidence and are enabling households to spend more and save more for big purchases—say, buying a home.
Besides global factors that bode well for buyers, the U.S. housing market is also in much healthier shape. Foreclosure inventories have fallen to nearly normal levels everywhere except for a few slow markets. As a result, distressed sales are no longer weighing on the market.
We’re back to a normal and upward trajectory for housing prices, and there’s little risk of prices declining because inventories are very low. I’m actually more worried about listings and new home construction not keeping up with the demand.
Market is primed for first-time buyers, sellers
I’ve said it before and I’ll say it again: 2015 is the year of the millennial when it comes to real estate. Millennials are at a critical demographic tipping point where their sheer numbers will naturally drive demand for more home sales. Most first-time buyers move into their first home when they’re between the ages of 25 to 34.
Sellers should also be encouraged—especially if they’re sitting in affordable homes waiting for a long-overdue upgrade. With recent clarification of mortgage standards, new low-down-payment programs, and lower FHA insurance premiums, access to credit should improve. That means those folks who’ve been sitting on equity in entry-level homes can finally upgrade to bigger homes and retirement homes.
What are the downsides?
There are some risks to keep in mind.
Supply must keep pace with demand, otherwise affordability declines more rapidly and would-be buyers can’t find the home of their dreams.
The U.S. economy could hiccup from global weakness.
Consumers could take the money they’re saving on gas and buy lottery tickets instead.
The probability of those risks completely reversing the recovery is slight, but it is strong enough to limit the potential. On the flip side, if the economy ends up growing more than expected and first-time buyers come roaring back, we could end up in an even stronger market. Here’s to a robust and strong 2015!
Jonathan Smoke is chief economist at realtor.com®.