Real Estate 2015 Predictions

Real Estate 2015 Predictions

Mortgage rates: Interest rates will likely be on the rise next year. In recent weeks, the 30-year fixed-rate mortgage has dipped below 4 percent. But by next year, Freddie projects mortgage rates to average 4.6 percent and inch up to 5 percent by the end of the year.
   
Housing starts: Homebuilding is expected to ramp up in the new year, projected to rise by 20 percent from this year. That will likely help total home sales to climb by about 5 percent, reaching the best sales pace in eight years.

   
Single-family originations: Mortgage originations of single-family homes will likely slip by an additional 8 percent, which can be attributed to a steep drop in refinancing volume. Refinancings are expected to make up only 23 percent of originations in 2015; they had been making up more than half in recent years.
   
Multi-family mortgage originations: Mortgage originations for the multi-family sector have surged about 60 percent between 2011 and 2014. Increases are expected to continue in 2015, projected to rise about 14 percent.

The demographic wave of Millennials will help boost prices: The U.S. has been stuck in a demographic rut, which has dragged down the demand for homes. For the past decade, the largest portion of the American population was made up of Baby Boomers, folks who long ago settled down and started families.

But late last year, the Census Bureau announced that the cohort of now-23-year-old Americans is the largest in the country, followed by 24 and 22-year olds, respectively. As this ascendent generation ages another year, more of them will start families and look to buy homes of their own. Jonathan Smoke, chief economist at realtor.com, argues that this generation will “drive two-thirds of household formations over the next five years.” Smoke thinks 2015 will mark the first year in which the Millennial generation’s presence in the housing market will be truly felt, especially in more affordable regions like the Midwest and the South.

Young people will continue to demand housing where it’s tough to build: At the S&P Panel, Nobel Prize-winning economist Robert Shiller pointed out that since the housing crisis, the total value of owner-occupied housing has remained flat. This is because builders have not been constructing many single-family homes at all, a situation that the U.S. economy hasn’t faced since the Great Depression.

Single-family home construction has been so subdued in part because the Millennial generation as a whole prefers to live where housing is expensive and where building is difficult. Jed Kolko, chief economist at Trulia, calls it the “Millennial mismatch” in a new report out Tuesday, where he shows that Millennials tend to live in markets like New York, Honolulu, and Austin, where homes are least affordable.

Home price increases will decelerate, but affordability will decline: The housing recovery slowed markedly in 2014. Home prices in October 2014 were up by 6.4% year-over-year, after climbing 10.6% in 2013. Economists polled by Fortune were nearly unanimous in predicting that home values would continue to rise, but even slower than they did this year.

That’s because the rebound from the bursting of the housing bubble has just about run out of steam, with Trulia’s Kolko estimating that homes are only 3% undervalued relative to fundamentals nationally. Surveys of homeowner sentiment suggest that more of them will look to sell their homes next year, putting more downward pressure on prices. But factors like the “Millennial mismatch” and rising mortgage rates will conspire to make the most popular markets unaffordable for the middle class.

Fortune & Realtor Mag