Rental & Home Ownership Trends 2015

Most economic prognosticators agree that while the recovery is still not complete, all indicators point to a housing market that is steadily gaining strength and one that will continue on an upward trajectory through 2015, albeit somewhat slowly. This coming year, the housing market will be driven more by underlying fundamentals, such as job growth, income increases, and household formation, than by major national events, such as the Great Recession and the unprecedented rise in home values – the “housing bubble” – that preceded it.

For the past several years, investors and other buyers scooped up undervalued homes, taking advantage of foreclosures and short sales, boosting overall sales volume and shooting up prices. Now, however, the buying frenzy is abating. Foreclosures are down (due in some respect to low mortgage rates that have allowed many homeowners to refinance their loans and stay in their homes), so investor demand is falling. This dynamic will cause prices to level off and approach a more historic norm.

With consumers a little more confident, and unemployment dropping to pre-recession levels, more homes should be coming on the market. However, home-buying affordability will not get much better in 2015, because even the smaller price increases than we have witnessed over the past few years – rising just 2.5 percent this year – will still outpace income growth. It is also likely that mortgage rates will rise, as well, keeping young buyers out of the market. In fact, the Mortgage Bankers’ Association predicts that rates for a 30 year mortgage will rise to five percent by the end of 2015.

That being said, more people may qualify for home loans, as Freddie Mac and Fannie Mae ease mortgage eligibility requirements, for example, allowing some buyers to come up with a down payment as low as three percent. New home sales should approach half a million units, and existing home sales could reach five million or more. That’s a 20 percent increase over last year with much of the uptick coming from first time buyers.

One dynamic that is working against the upward trend in new housing starts is the tendency for younger buyers to rent, rather than buy a home. For many Millennials (those under the age of 35), the housing crash of 2008 has upset the notion that home ownership is the tried and true path to economic security. In addition to not having enough for a down payment, these young people simply no longer believe that they must own a home in order to fulfill their own idea of the American Dream. In addition, many Baby Boomers who are approaching retirement, will be selling their homes, but rather than buying new ones, will be more and more likely to move closer to city cores, spending down their buyouts on rental units.

These trends will likely result in rent increases outpacing home value growth. In fact, it is estimated that rents will rise 3.5 percent in 2015, a full percentage point higher than home values. That suggests that multi-family construction will boom in order to provide housing for the growing rental market.