Recently, at a panel discussion on the 2015 trends in the real estate market, David Blitzer, the chairman of Standard and Poor’s Index Committee, was asked to tell a few words about the future of the real estate market in the U.S. He answered with only one word: “Mysterious.”
This means that the future of the real estate market can amaze even the experts. Furthermore, it means that housing has reached the crunch point. With home prices close to the bubble levels, we can not expect the “rebound effect” which has been powering appreciation.
Fundamentals, like demographic indices and wage growth, as well as the preferences of a new homebuyer generation, will dictate the direction of home prices in the next year.
Here are four trend-projections in housing for 2015:
1. The new wave of Millennials will boost prices: The U.S. has got into a demographic rut, which has decreased the demand for homes. Baby-boomers were the main part of the American population in real estate. They already had jobs and were settled with families. But late last year, the Census Bureau announced new research showing that current housing market is crowded with 23-year-old Americans, followed by 24 and 22-year olds, Millennials, in other words.
Apparently, this predominant generation will start families and look to buy properties of their own. Chief economist at realtor.com, Jonathan Smoke, says that Millennials will “drive two-thirds of household formations over the next 5 years.” Smoke claims that in 2015 Millennial’s presence in the market will be truly felt, in particular in more affordable regions like the South and the Midwest.
2. Young people will demand housing where it’s tough to build: At the S&P Panel, leading economist Robert Shiller noticed that since the housing depression, the total value of owner-occupied housing hasn’t changed. A financial period that the U.S. economy hasn’t faced since the Great Depression was caused by the lack of construction of single-family homes. The Millennial generation as a whole prefers to live in areas where housing is most expensive and where building is difficult. In Tuesday’s report Chief economist at Trulia, Jed Kolko, called it the “Millennial mismatch”, in this report he shows that Millennials are apt to live in markets like Austin, New York or Honolulu, where homes are least affordable.
3. Mortgage rates will rise: While many economists were sure that mortgage rates would rise in 2014 following an improving economy and the closing of the Fed’s bond-buying program, the housing market conditions remain the same. This year started out with distressing news that the U.S. economy has fallen away which put more downward pressure on mortgage rates and overall interest. Now, a 30-year mortgage is lower on average than it was at this time in 2013.
But economists are still convinced that next year will be the year rates rise more notably, citing, on the back of an improving domestic economy. Jonathan Smoke sees the 30-year rate at 5% by the end of 2015, and this is a more than 100-basis point growth from today.
4. Home prices won’t appreciate as fast, but affordability will decrease: The housing market recovery slowed noticeably this year. Prices in October 2014 were up by 6.4%, after climbing 10.6% last year. Economists and analysts polled by Fortune were nearly consentient in forecasting that home values would continue to grow, but even slower than they did in 2014.
Surveys of landlord sentiment stated that more landlords are planning to sell their homes in 2015, thereby lowering the prices. But fundamentals like the “Millennial mismatch” and increasing mortgage rates will make the popular housing markets less affordable for the middle class.