Predictions From The Experts

It’s been an odd year for the housing market. It kicked off with the ‘Polar Vortex,’ blamed for slowing home sales in the early part of the year. As 2014 draws to a close, the National Association of Realtors expects sales of previously owned homes to fall short of 2013’s total, while the latest monthly data on new homes show sales were up just 1.8% in October from a year earlier. Meanwhile, price gains for previously owned homes have slowed significantly. Still, builder confidence in the market for newly constructed, single-family homes has been high for six straight months.

What’s going on? The confusing signals actually have a straightforward explanation: the housing market has been shifting out of rapid recovery and into a more stable phase that economists are calling the new normal. Here are 11 things housing experts expect to see in housing in 2015

1. Prices will rise more slowly

Housing price gains slowed dramatically in 2014 and are expected to continue on that trajectory in 2015. Price growth for previously owned homes decelerated for nine straight months from January through September 2014. To get a sense of just how much has changed in a year, compare December 2013’s 10.8% year-over-year price growth with September 2014’s 4.8% year-over-year change (S&P/Case-Shiller data). Easing housing inventory levels and the exit of investors from the market are helping to put the brakes on home price escalation. At a deeper level, this change represents a fundamental shift in the market: we’ve moved out of the rapid recovery phase and into a new normal. Nationally, prices are near their spring 2005 levels; the 20 cities Case-Shiller tracks are about 15% to 17% off their mid-summer 2006 peaks. “During the early years – roughly 2012 to 2014 – the rebound effect drove the recovery,” says Jed Kolko, chief economist at Trulia. “Now, though, the rebound effect is fading.” Zillow predicts home prices will rise just 2.5% in 2015; predicts an annual gain of 4%-5%.

2. Affordability will worsen

Unfortunately, slowing prices don’t mean that home ownership will become more affordable. In fact, Kolko predicts quite the opposite. “Even though prices won’t rise as fast next year as they did this year, they will probably rise faster than incomes,” he says. (Incomes in 2013 rose just 1.8% in nominal terms, he notes.) “At the same time, higher mortgage rates also erode affordability.” By Kolko’s estimate, homes are just 3% undervalued now, leaving little room for them to rise without becoming overvalued. predicts that home affordability will decrease by 5%-10% in 2015.

3. The buying frenzy will fade

Good news for regular people: the homebuying process should get a little less hectic in 2015, thanks to eased inventory and credit plus the exit of investors from the market. We’ve already begun to see the shift. As prices rose in 2014, more people put their homes up for sale. (In October, the stock of available housing stood at a 5.1-month supply, 5.2% higher than a year before.) Rising prices mean that fewer bargains are left on the market, which makes housing less attractive to investors, and they are indeed exiting the market. (The latest numbers from the National Association of Realtors show that in October, individual investors purchased 15% of homes, down from 19% in October 2013.) “Since the recovery began in earnest in late 2012, buyers have really taken it on the chin, forced to contend with low inventory, tight credit, bidding wars and intense competition from investors and all-cash buyers,” says Stan Humphries, chief economist at Zillow. “But next year we’ll start to see things really turn around. More inventory will continue to come online, putting the competitive pressure on sellers for a change. This more balanced market will be smoother sailing for everyone, both for buyers in search of a competitive advantage, and for sellers who turn around and become buyers themselves.”

4. Mortgage interest rates will rise

The Mortgage Bankers’ Association predicts that rates will rise to 5% by the end of 2015; Freddie Mac’s chief economist Frank Nofthaft expects a more cautious average of 4.5% in 2015. With the Fed signaling that QE3 (the third round of quantitative easing since the recession) is over, the MBA says there is plenty of reason to believe a short-term fund rate hike could come by mid-2015, pushing mortgage interest rates up with it. Still, last year economists predicted that mortgage interest rates would hit 5% by the end of 2014—and yet the average rate for a conventional 30-year, fixed-rate mortgage stood at just 3.93% last week, compared to 4.42% one year earlier, according to Freddie Mac. For most of 2014 interest rates were flat or declining. A great reminder that economists can make their predictions, but we wouldn’t recommend that anyone bet the farm on them.

5. Millennials overtake Gen X as homebuyers

By the end of 2015, Millennials (those under the age of 35) will overtake Gen X (35-50 years old) to become the largest group of homebuyers in the U.S., predicts Zillow’s Humphries. “Roughly 42% of Millennials say they want to buy a home in the next one to five years, compared to just 31% of Generation X,” he says. “The lack of home-buying activity from Millennials thus far is decidedly not because this generation isn’t interested in homeownership, but instead because younger Americans have been delaying getting married and having children, two key drivers in the decision to buy that first home. As this generation matures, they will become a home-buying force to be reckoned with.”

6. Rent increases will outpace home value growth

In 2015 many 25- 34-year-olds (again, those Millennials) will form new households, but instead of buying they’ll rent, predicts Trulia’s Kolko. In part, this forecast is based on demographic factors (marriage, kids, cited above) and in part it’s because many of them will still need to save for a down payment. These factors will continue to push the demand for multi-family housing (see below)–and rents will keep rising. In fact, Humphries forecasts that rents will rise 3.5% in 2015, outpacing his predicted 2.5% for annual home price gains. This, in turn, may push some of those Millennials to become buyers (see above). “As renters’ costs keep going up, I expect the allure of fixed mortgage payments and a more stable housing market will entice many more otherwise content renters into the housing market,” Humphries says.