Economic conditions—from low interest rates to stabilizing home prices—point to a solid year for the housing industry.
While economists aren’t predicting a drastic change of fortune for homebuilders, enough positive movement in sales, starts and prices by the end of 2014 led most of them to offer largely optimistic predictions for the near future.
Here are four emerging trends that have bolstered confidence among economists and homebuilders.
1. Millennials will buy homes.
A tight job market, hard-to-get mortgages, and a collective decision to delay marriage and children have made homeownership a tough sell when it comes to millennials, the millions of young adults whom the economy was relying on for a jump-start as they bought buying homes, furniture, cars, and baby clothes.
They haven't done that.
But 20- and 30-somethings eventually move out of their parents’ basements, marry, and form households, and most economists say that’s going to start happening this year, as they react to the 3% boost in job growth for their cohort that had occurred by the end of 2014.
Economists at Zillow, for instance, have predicted that 23- to 34-year-olds—known as millennials or Generation Y—will outpace the slightly older Generation X as the largest group of U.S. homebuyers next year as they begin to trade in their rental units for homes in cities where the job markets are healthy and amenities appeal to young people. Zillow predicted Pittsburgh, Hartford, CT, Chicago, Las Vegas and Atlanta will be their first stop.
“Life catches up to everyone, and as this group ages, they will begin to settle down and start buying homes en masse,” Zillow explained in a recent report. “Being the largest generation in the country, millennials … have numbers on their side.”
2. Home prices will rise, but not spike.
The roller coaster ride for home prices is over in most markets, even those where inventory was so scarce in 2013 that house hunters entered into bidding wars with competing would-be buyers and paid far more than the asking price.
Continued low mortgage rates, combined with a growing inventory of property for sale, will temper spikes in price appreciation—although many economists point out that home values, at least in major cities, are already so elevated that buyers must pay an atypically high percentage of income toward housing costs.
Still, it’s likely homebuilders will introduce more reasonably priced inventory to the marketplace as younger buyers embrace homeownership. And as home-value appreciation steadies, more current homeowners could hurry to put their own dwellings on the market before prices dip too low for them to profit or rise too high for them to afford replacement homes.
3. Job growth will spur homebuying.
That movement could fuel home sales, which are expected to grow by 9% next year. And housing starts could increase by 14% next year, according to industry estimates.
The increases depend on job growth, about which economists have expressed optimism. “Overall, the economy finally appears to be gaining enough momentum to help provide the support that the housing market has needed for stronger recovery,” according to a Core Logic forecast. “The combination of stronger employment growth and especially millennial job growth makes for solid footing for the real estate market.”
4. Interest rates will rise—but not too high.
Nobody is predicting that interest rates will drop in 2015, although they took a dip below 4% at the end of last year that wasn’t on every economist’s radar.
Still, those economists haven’t quite agreed on where interest rates will settle. Estimates range from 4% or so to nearly 6%, beginning around mid-year. Most foresee a ceiling of just below 5% by the end of the year.
Upward-creeping interest rates could increase costs for mortgages and other consumer expenses—like car loans and credit card debt. “It’s only prudent for consumers to prepare themselves,” Bankrate.com’s chief financial analyst, Greg McBride, told The Washington Post this week.
Still, some predict a slightly higher interest rate won’t have a major impact on home sales, pointing to tough-to-meet credit standards, high home prices and the requirement for down payments as greater obstacles to homeownership. In fact, 2014’s lower-than-expected rates did not translate into greater home sales.