Good-Bye 2015, Hello 2016: Where Real Estate Is Headed In The New Year

Frantzou Fleurine, UnsplashWhen we rang in the New Year for 2015, real estate pundits were sharing national trend opinions that centered on “normalcy” and “balance.”  Experts predicted slowed home value growth, which needed to occur for the housing market to level out to a more balanced point. Low inventory issues were forecast to dissipate. First time home buyers supposedly were right off stage, ready to step into the real estate limelight. New home construction was expected to pick up the slack, especially in the lowest inventory regions within the U.S.

The 2015 real estate market did not quite pan out as predicted.  It’s varied greatly, depending on what region you were trying to buy in. At about the half way mark of the year, the discussion of the potential for a housing bubble became national headlines.  Windermere Real Estate’s chief economist, Matthew Gardner, explored this topic on several occasions during the second half of 2015.  Gardner has reassured us that a housing bubble would not be forming any time soon. He did spec out the rapidly growing markets in San Jose, San Diego and San Francisco as ones to watch. Due to these cities’ exponential home price growth a “frothy” housing market  may be on the horizon in their regions, one where homes become priced outside of the budgets of buyers earning that area’s median income once mortgage rates start to rise again.

Interest rates did not rise much at all throughout 2015, even though some projections placed 30 year fixed rates nearing a high of 4.75% toward the end of 2015. In actuality, many weeks during 2015 the interest rate for 30 year fixed mortgages hovered below 4%. In December, the Federal Reserve did finally increase the Fed Funds Rate by .25%, which led to some modest speculation about the possibility of entering a rapidly rising interest rate situation. Matthew Gardner explained why we would not see those speculations come to fruition right now.    He cited what types of credit are tied to the Fed Funds Rate, which include revolving credit like credit cards or home equity loans. Mortgage interest rates are tied to 10-year treasury bond yields, which were not boosted in December.  In fact, as of Christmas Eve 2015 the 30 year FRM remained below 4% even with the recent Federal Reserve activity.

Millennials were supposedly primed to take up the first time home buyer gauntlet during 2015. However, the number of people below the age of 35 that are homeowners is still receding from levels before the Great Recession. As of the 3rd quarter during 2015, 35.8% of all homeowners were under the age of 35. That’s a bit over a third of all homeowners, but their inability to purchase homes in higher priced, seller driven housing markets, like the Seattle area, may be a reason for concern. Their income and debt are not in line with home affordability in these desirable urban regions. Even though our economic outlook is rosier in the Puget Sound area, the median income for a millennial does not match up with median home prices in the most popular Seattle and Eastside neighborhoods.

Now that we have witnessed 2015 unfold, and reviewed what did not pan out from last year’s New Year predictions, let’s take a peek at real estate projections for 2016:

  1. An increase in fixed rate mortgages. Realtor.com is forecasting an increase to 4.65% by the end of 2016, which is still less than the 4.75% pegged by some experts as 2015 dawned almost a year ago.
  2. Slowdowns in both home sales and home prices. This is not seen as a bad thing, but a necessary happening to return the housing to a more normal state.
  3. More millennials entering the housing market. Rising rental costs, growing families, the potential for climbing mortgage rates are all factors that will probably nudge millennials to enter the housing market at a gradually increasing rate.
  4. More affordable new construction. Homebuilders who are embracing entry level homes, and increasing the number they are building, are outperforming peer companies.
  5. Seattle will still be a hot real estate market during 2016. Svenja Gudell, new chief economist for Zillow.com, mentioned the continued decline in inventory and demand in our region will still fuel our local housing market in the New Year.
  6. Technological innovations for the real estate transaction process will continue to hit the market place. OB Jacobi, president of Windermere Real Estate, has shared how important it is for the industry to maximize technology to empower and educate consumers in meaningful and innovative ways.
  7. Rents will continue to rise at a faster pace than home prices. This is a trend to be watching closely, since such a large chunk of the country features rental prices that exceed 30% of renter incomes. In the Seattle area, we started seeing some relief from continued big increases in rent toward the end of 2015, but it’s still tough to find an affordable rental in popular Seattle neighborhoods. Seattle rents are the 8th highest in the nation.

Now it is your turn. What do you think will be on the horizon of the 2016 housing market? Do you think interest rates will still hover in the low 4s for most of the year, or start to creep up toward 5%? Will the seller’s market still dominate Seattle real estate for most of 2016? Please share your thoughts in the comment section below.

Photo credit: Frantzou Fleurine, Unsplash.com

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