Over the last decade, the sub-prime mortgage crisis was one of the most impactful financial events. Net losses for US homeowners rose to more than $1 trillion and this significantly diminished the buying power for large numbers of families across the nation. But we have seen some major economic improvements in the years since, and most of this financial destruction has ultimately been recovered.
So the real question real estate investors are asking is: Can these positive trends continue in 2015? Those that might be looking to purchase a new home will need to know if now is a good time to re-enter the market, or if it is better to wait on the sidelines until better opportunities can be found. But when we look at the consensus opinions seen in the real estate analyst community, the outlook is still largely positive. Housing website Zillow.com predicts that average home values will increase by 2.5% in 2015, while Realtor.com is slightly more optimistic in its projections that call for increases as high as 4-5%. Here, we will look at some of the factors that will likely send housing prices higher in the year ahead.
Better US Economic Data
In the years since the sub-prime lending crisis, US economic data has rebounded heavily. Key financial metrics like monthly jobs numbers and the national unemployment rate are currently holding at their strongest levels in years. In fact, 2014 was the best year for jobs creation since the turn of the century. While labor market data and the projected outlook for real estate markets might seem like somewhat unrelated sectors of the economy, it should be remembered that higher jobs numbers boost consumer confidence and make it might easier for households to commit to large purchases. As long as these trends continue, we can expect the cumulative effect on the housing market to remain supportive.
Sustained Positive Momentum
Another factor to consider is the positive momentum in housing prices that has been sustained over the last five years. According to the S&P/Case-Shiller housing report for September 2014, US home prices rose at a rate of 4.8% relatively to the year before. Significant gains in real estate were seen in 2013, so the fact that there is still the potential for growth is highly encouraging. It is true that the pace of growth has started to decelerate, as the same report from December 2014 showed a yearly increase of 10.8%. But it is important to remember that slowing growth is still growth, and this ultimately suggests that US home buyers are still able to make home purchases even with values at higher levels.
A good portion of these positive trends stems from the fact that we are seeing reduced supply in the market. Recent economic reports show that home inventories have declined as speculators have largely exited the market. This suggests that the people that are actually going those houses will live in them, rather than trying to flip them for a profit. History shows that foreclosure rates are much lower for owner-occupied homes, so it is much less likely that we will see a rise in foreclosure rates in 2015. Across the country housing prices have risen back toward levels seen in Spring of 2005, and roughly 15% below the peaks seen in 2006. This shows that the broader market momentum is still positive but has yet to reach the point of exhaustion.
Potential Negatives: Rising Mortgage Rates
All of these underlying factors should support home values in 2015. But it is important to consider potential negatives, as well. First on the negative side is that fact that mortgage lending rates should start to increase sometime in the middle of next year. The US Federal Reserve has ended its historic quantitative easing programs and this suggests that the central bank will start to normalize its interest rate policy. Higher interest rates mean that it will be more expensive to borrow money, and this could make it more difficult for households to make their mortgage payments.
Forecasts from the Mortgage Banker’s Association suggest that we could see interest rates as high as 5% by the end of next year, and this will almost certainly eat into the buying buyer for average US households.
Conclusion: Expect Gains, But At A Slower Pace
Overall, the balance of the evidence points to continued gains in real estate prices, but at a slowing pace of growth. Watch for outside factors like raised interest rates by the US Federal Reserve to pose a “wild card” factor that could deter these projections.