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January 2015

Experts predict prices, mortgage rates, homebuilding to rise during 2015

January 2015 - NWREporter

With the best year in the country's economic recovery since the recession of 2008-2009 in the books, housing industry experts are turning their attention to 2015. Economists tend to agree the new year will bring increases in mortgage rates, home prices and housing starts.
Millennials (also known as Generation Y and generally consisting of those born between the early 1980s and early 2000s) are expected to play a big role in sustaining the housing sector recovery.

Jonathan Smoke, chief economist at realtor.com, noted millennials are at an age when many marry and start families. He expects this cohort will "drive two-thirds of household formations over the next five years," thereby accounting for about 65 percent of first-time home buyers. "Of the millennials who are buying a home, 86 percent indicate that their motivation is a change in family size," Smoke stated.

The optimism around Gen Y is tempered by tough credit qualification standards, and the fact that many millennials have limited credit history. Consequently, Smoke believes they're expected to buy more in affordable areas in the Midwest and the South.

Seattle should still fare well in attracting millennials, in part due to its growing tech sector.
For example, Amazon recently announced it needs developers to build 6,000 residential units to accommodate its growing work force, which has an average age of 31.

Commenting on the company's focus on Seattle's urban core, Amazon CEO Jeff Bezos said the types of people his company employs and tries to recruit "appreciate the energy and dynamism of an urban environment." That company's plans for a new five-acre headquarters with a tri-sphere biodome (see photo) reflect its desire to create a more natural setting for employees to work and socialize.

Amazon

Millennials and other would-be home buyers can expect to pay higher (but still reasonable) interest rates on their mortgages in 2015, thanks in part to the improving domestic economy and a lack of stimulus from the Federal Reserve. Economist Smoke expects the 30-year fixed rate to reach 5 percent by the end of 2015, but believes the one-year adjustable rate will likely rise less if much at all. "We are likely to see a shift into more adjustable and hybrid mortgages over fixed," he suggested.

Economists also expect home price increases to decelerate. Most economists polled by Fortune predict rising values, but at a slower rate than during 2014. Surveys of homeowner sentiment indicate more owners look to sell their homes next year, which should put more downward pressure on prices. Affordability is also expected to decline in some markets.

To ease tight supplies, builders are likely to start more new housing units in 2015 than during 2014. Their focus is also expected to shift from multifamily to single family dwellings.
Smoke, the realtor.com economist, forecasts a 16 percent increase in housing starts, driven by 21 percent growth in single-family starts. But he cautioned that shortages of labor and building product material could limit further growth in construction and keep overall supply tight.

Another positive note for housing is the dwindling number of foreclosures.

"We are on pace for foreclosure inventories to end 2014 down more than 30 percent, and next year should see a slightly greater decrease as foreclosures fall to normal levels," remarked Smoke.

Industry insiders say one area of concern continues to be a lack of access to credit. Strict mortgage qualification standards are keeping many would-be owners, especially younger ones, from purchasing with a bank loan. Smoke believes opening up access to credit would be a "game changer."

Various new federal housing policy initiatives could help loosen qualification standards.
"If you just look at the distribution of credit scores, at least 10 percent of current homeowners with mortgages would not qualify for a new mortgage today," Smoke said. More access could allow 500,000 to 750,000 prospective buyers to achieve the dream of homeownership.

In making their predictions, the economists emphasized housing is a local issue, with situations differing in every market - even among neighborhoods, according to Smoke. "Each has its own unique long-term trends in home values, which reflects local demand and supply conditions."

Downtown Seattle is a neighborhood with upward trending demand for housing.
Following a Northwest Emerging Trends 2015 event presented by the Urban Land Institute, that group's Northwest executive director was upbeat about Amazon's call for developers to build 30 new residential buildings in and around downtown Seattle with at least 300 units each to accommodate its employees.

Mann noted Seattle ranks third nationally for real estate development and fourth for investment. "We are very fortunate to have such strong growth in our region," he added.
In an interview with GeekWire's Todd Bishop, the ULI executive said, "At the end of the day, jobs drive real estate value . . . Amazon is hiring and their new hires need places to live. This demand will support a healthy housing market for the foreseeable future."