While the U.S. housing market and home lending levels in 2014 continued an uneven recovery from the Great Recession of 2008-2009, the coming year could see many of those gaps finally filled in as economic and job growth in the U.S. accelerates and consumers benefit from low inflation thanks to plunging gasoline and energy prices.
So if you’re buying or selling a home in 2015, or looking to make an investment in real estate, here are some things to watch for in the coming year.
Better market for buyers
For middle class home buyers in the U.S., 2015 should be a better year with more inventory coming on the market, according to Jed Kolko, chief economist with Trulia.com in San Francisco. With recent home-price appreciation expected to begin to flatten out, current owners will have incentive to sell before prices dip again, Kolko said.
The median sales prices for single family homes in 2014 was an estimated $217,300 up 4.9% from 2013, when the median sales price was $197,400, according to the National Association of Realtors.
“Lots of people have gotten back above water, so that’s good news for buyers,” as more homes will be placed on the market, he said.
Dan Levy of CityRealty, a real estate sales search website in New York City, says that low interest rates, a booming stock market and a strengthening economy, plus foreign investors’ continuing interest in American real estate, will create almost “the perfect storm” for real estate in 2015: “The market is as healthy and people are as bullish as I’ve seen in 20 years.”
Mortgage rates to stay low
Mark Livingstone, a mortgage broker and president at Cornerstone First Financial in Washington, D.C., says he sees a prosperous 2015 ahead, and he plans to add to his staff of mortgage officers as a result. The key factor? “Interest rates are going to stay low because of geopolitical unrest, and that will keep inflation in check, along with lower oil prices. That will translate into more buyers starting as soon as February,” he said.
While the surprise of 2014 was interest rates that stayed low and even dipped below 4% (for 30-year fixed mortgages), some lenders note that low interest rates have yet to translate to higher volume of home sales, especially in entry-level markets, as many industry insiders say credit standards remain too tight in the aftermath of post-crash financial reforms.
“I would trade higher interest rates for additional liquidity,” says Anthony Hsieh of loanDepot in Foothill Ranch, Calif. “We have low rates, and very bad volume. There’s not a lot of excitement at the moment,” he said.
Daren Blomquist of RealtyTrac says the industry is “addicted” to low rates, and he worries that a sudden spike in interest rates could price a lot of new buyers out of the market. In some markets, prices have risen beyond pre-crash levels, and in markets like New York and San Francisco “the level of un-affordability is back to where it was during the housing bubble,” he said.
Credit crunch to continue for many
LoanDepot’s Hsieh says he has been encouraged by the recent moves by the federal government to expand credit by allowing agencies to buy loans with lower down payments as well as other moves that are designed to give lenders more guidance and confidence in making loans.
“There’s lots of communications coming out that we need to increase availability of credit the marketplace,” he said.
Still, the overall tightness in credit standards will continue to hurt first-time borrowers in 2015, especially the millennials. While the Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to begin buying loans in 2015 with as little as a 3% down payment, Trulia’s Kolko says that is unlikely to help.
“For young people, a slightly lower down payment requirement won’t solve the problem of not having a good steady job and a good credit history,” Kolko says. Many millennials are struggling with crushing student loan debt burdens and jobs that don’t pay well, which hurts the all-important debt-to-income ratio that’s computed into lending decisions.
Scott Everett, president of Supreme Lending in Dallas, which made more than $4 billion in home loans in 2014 says that compliance costs of Dodd Frank regulations and fear of the Consumer Financial Protection Bureau (CFPB) will spur another round of mergers and consolidation among lenders in 2015. “A compliance department that used to have two people now requires twenty-two,” he said.
For real estate investment hot spots for the wealthiest like New York, property is likely to get even more expensive, as economic and political turmoil make other markets look less attractive.
“Hong Kong, Moscow and Dubai are no longer ‘safe’ investment spots compared to New York and London,” said CityRealty’s Levy, who expects nearly a dozen ultra-luxury apartments in Manhattan to sell for more than $100 million each in 2015.
Elsewhere in the U.S., former Rust Belt cities like Pittsburgh, Cleveland, Milwaukee and even Detroit are trying to repurpose themselves and could provide investors new opportunities. “You can get in at one-tenth the cost,” of a New York or a San Francisco, says Levy.
Elsewhere, cities like Boulder, Colo. and Austin, Texas, have become technology hubs and established themselves as good markets for real estate investments. “Smaller cities are going to be an interesting story for the next couple of years,” he said. Other North American hot spots will continue to be Miami and Toronto, he said.
On the flip side, Daren Blomquist of RealtyTrac says that inland California, which was hit badly in the last real estate crash, could be due for yet another correction, as a result of the five-year long drought that has devastated crops and ranching in the typically fertile valley that stretches for hundreds of miles from Chico to Bakersfield. “It’s really in dangerous territory because of the drought,” he said. “They are still reeling from the last crisis and unemployment is still really high.”
The late 2014 gift of lower gas prices (which could act as a $1,000 to $2,000 tax break for middle class families) could carry over into the housing market, at least in a small way.
Blomquist says lower gas prices could boost the refinance markets or encourage move-up borrowers. “I don’t see it moving the needle that much, [but] it could make some homeowners more comfortable tapping their equity,” for a large purchase such as a boat or a vacation home.
Gas prices fell for 88 straight days between Sept 25 and Dec. 22, according to AAA, to a national average of $2.39, down 85 cents a gallon from a year ago. The savings amount to about $450 million a day for consumers, AAA said.
If low(er) gas prices do last for at least a year or two, Blomquist said it could help the entry-level home buyer who typically has to “drive till you qualify.” It could also help some far-flung suburban communities like Stockton, Calif., which bore the brunt of foreclosures when gas prices soared and commuters could no longer afford their homes. Kolko of Trulia says lower gas prices “could alter some housing patterns with some willing to have a longer commute,” he said.
The oil-price crash of the 1980s brought down real estate markets like Houston, and to a lesser extent, Dallas. The good news: Today those markets are more diversified, with technology and financial services companies and more corporate headquarters than 30 years ago, says CityRealty’s Dan Levy. “There isn’t the crazy overbuilding that we saw during the tail end of the S&L crisis,” in the late ‘80s and early 1990s, Levy said.
By: DANIEL GOLDSTEIN
PERSONAL FINANCE REPORTER