New Year, New Housing Market Predictions: Our 7 Best by Amanda Maher
Depending on who you listen to, the residential real estate market could go gangbusters in 2016 or prices could plummet. Who’s right is anyone’s guess. If I had a crystal ball, I’d be in a lot different place than I am today.
That said, based upon what we’re hearing, here are a few reasonable predictions for the 2016 housing market:
Housing starts will rise—but not nearly fast enough. U.S housing starts in November rebounded from a 7-month low and building permits surged to a 5-month high (up 11%, representing a seasonally adjusted pace of 1.29 million units). This is welcome news for those in the market for a new home – but the reality is that housing starts are still far too low. Freddie Mac predicts total housing starts to increase 16% year-over-year, but that will only put a small dent in the new units needed. Inventory will remain at record lows. Some markets continue to be affected more than others (e.g. coastal cities are faring much better than those in middle-America). A lack of inventory will likely deter some homebuyers who simply cannot afford the steep prices. That said, even with the cost of houses today, there are enough homebuyers ready to pounce that it will remain a seller’s market for the foreseeable future.
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Housing prices will continue a gradual climb. See above for supply-and-demand 101 for why this is the case. According to Fannie Mae’s National Housing Survey, consumers can expect home prices to climb a modest 2.3% between now and next year. That’s less than half the 5% increase we saw in 2015.
Rents will climb faster. “Renters in 2016 will be caught between a bit of a rock and a hard place,” says Daren Blomquist, vice president at RealtyTrac, “with rents becoming less affordable as they rise faster than wages.” For instance, RealtyTrac finds that rents on three-bedroom properties will increase an average in 3.5% in 2016. If wage growth remains stagnant, this presents a challenge for renters, particular in urban markets like New York, Miami and Boston where rents are already steep.
More buyers will enter an already tight market. Though wages remain stagnant, overall, job market is stronger heading in to 2016 than it has been since the Great Recession. By some estimates, the U.S. was on pace to add 2 million jobs by the end of this year. With the national unemployment rate down to 5%, consumers are feeling more confident and stable than they have in years past.
The rate hike won’t deter buyers—at least not yet. “But interest rates are going up!,” you might argue. Yes. They are. But barely. And it isn’t going to make a whole heck of a lot of difference in the short term. A survey by Lenders One found that 89% of its mortgage banker members believed that the 2016 market would weather a modest interest rate hike. Let’s not forget that largely because of Fannie Mae and Freddie Mac, there has been a slight easing of credit and a host of new loan products are being offered to borrowers. With these programs in place, credit remains cheap—a half a percentage (even a full percentage) isn’t going to steer away borrowers who have been waiting for the past few years until they were on solid financial ground before buying.
Who won’t be buying? Millennials. Oh “Millennials” – that dirty word. As we reported last week, Goldman Sachs has just released a study that found the share of 18-34 year olds living at home had climbed 4% between 2006 and 2012. Yes the job market is better than it was for those who entered the job market at the bottom (confession: I was one of them! May 2009. Ugh). But let’s not forget that many took on tens of thousands of dollars in student loan debt for the promise of finding a job once the economy improved. And now many of the new jobs are lower-skilled positions at lower-wages than positions of market cycles past. Don’t expect many Millennials to be taking on more debt in the near future, even if it is “good debt” as some may argue. Millennials watched as their parents struggled to make mortgage payments, lost equity and sometimes even lost their houses. Scary stuff for Millennials to think about when they’re already swimming in debt.
But if Millennials do buy, they’ll look for creative financing sources. There’s a growing demand for marketplace lenders, most of which are Internet-based and many of which can provide peer-to-peer lending solutions. Most marketplace lenders dabbling in debt consolidation and student loan refinancing, but some are getting into the mortgage loan business. “Friends don’t let friends use banks,” writes Foundation Capital. “Young people are particularly disdainful of banks. Seven out of ten would rather go to the dentist than listen to what banks are saying.” It should come as no surprise that this tech-savvy generation is developing tech-based lending products for their peers. The extent to which marketplace lending will truly disrupt the traditional banking model is yet to be determined.