We’ve got good economic news coming out of the U.S. finally! Job creation is expected to be the highest on record since 1999, and the overall economy grew mid-year at its fastest pace in more than 10 years
This is great news for the U.S. housing market, which is dependent on job growth. But don’t expect real estate sales and home prices to boom in 2015.
While more people are obtaining employment, salaries have not increased as rapidly as home prices in many U.S. cities (Seattle, Portland, NY and most of CA). If this continues, more and more people will be priced out of the housing market, especially if interest rates rise.
However, in, highly affordable markets where jobs are abundant and salaries are increasing faster than home prices, expect home prices to continue to increase in 2015. (Texas, Indiana, North Dakota and Pennsylvania). In these markets, higher interest rates will have little impact.
Young adults are still facing high unemployment, forcing many to continue living with friends or relatives. As a result, new household formation is only around 500,000 this year, about half what it would be in a robust market. These new households are expected to be renters until they have a 2 year job history and have saved enough money saved to buy a home. Most have to pay down their massive student loan debt first, and that could take years.
Demand for rental property will likely be high for the remainder of this decade, so expect rents to continue to climb during that time – especially in areas where the job growth is attracting entry-level employees. This is exactly where buy & hold real estate investors should be focused.
So who will be buying homes?
Certainly smart real estate investors are buying properties to serve the strong rental demand.
And if job growth continues to accelerate in 2015 as expected, wages are expected to increase as well. This could attract more first-time home buyers into the housing market, which will allow more move-up buying activity.
Additionally, it could become easier to qualify for mortgages next year. Fannie Mae and Freddie Mac are now allowing down payments as low as 3% of the home price.
Banks are also expected to loosen up their overly strict lending standards due to Fannie and Freddie’s recent clarification on loan buy backs. Banks have suffered billions of dollars in penalties for issuing poorly documented loans and have been forced to buy many of them back. They were reluctant to lend for fear of more penalties and buybacks. The new rules state that buy backs will only be enforced if the original underwriting does not meet “Ability to Repay” requirements or if there is evidence of fraud.
Existing home sales were fairly flat in 2014, which could be blamed on a slow start to sales early this year due to freezing cold temperatures across the country. Plus, foreclosures and short sales accounted for just 9% of available inventory, down from 14% last year. Less distressed inventory means there were fewer “bargains” on the market, driving the median home price up.
Many people mistake these price gains as “appreciation” but in reality, it was a “bounce back” to normal after an over-correction. Now as price gains are slowing, many people ask me if we’re headed for another housing recession.
It’s highly unlikely that we’ll see major price declines. Sales and home prices will stabilize but they won’t crash like in 2008. The housing crisis at that time was based on a mortgage meltdown from loose credit. Remember, ANYONE could get a loan back then, whether they qualified or not. That has not been the case over the past 6 years! In fact, borrowers were heavily scrutinized and had to more than prove their ability to repay the loan.
Wall Street pays close attention to housing starts (how many new homes are being built) and new homes sales. Construction was definitely affected by the abnormally cold weather in early 2014, but we still made it over the 1 million mark, which is 3 times what was being built during the Great Recession.
Housing starts are up nearly 8% from last year, and that number is expected to increase to as much as 16% in 2015. All this new home construction could boost the GDP growth next year, creating even more jobs and a stronger economic recovery.
The outlook is good for 2015! Higher employment combined with loosening lending standards will bring more real buyers into the real estate market. Additionally, there will be a healthy rental market for real estate investors.
This content was originally from an interview Kathy Fettke did on CNBC. She is the creator of Real Wealth Network. You can find her original post, along with a video of the interview, by clicking here.