More Sales But Conditions Stay Tough for First-Time Buyers

Home sales are expected to increase to 5.5 million units from 5.3 million next year as job creation and other economic fundamentals remain strong, but longer-term prospects for home ownership face head winds if younger households continue to find it difficult to buy.

The U.S. economy grew by 2.1 percent this year, job creation hit a strong 2.4 million, wages are rising modestly, and interest rates remain at historic lows. These are all positives for housing, NAR Chief Economist Lawrence Yun told thousands of REALTORS® attending a residential housing outlook forum yesterday at the 2015 REALTORS® Conference & Expo in San Diego.

But it’s mainly existing home owners who are benefiting, because the growing economy and persistent shortages of for-sale housing are driving up their equity gains and making it easier for them to become move-up buyers and buyers of vacation and investment property. Appreciation reached 6 percent this year and is expected to be 5 percent next year.

For the 88-million-strong millennial generation, the oldest of which is 34 years old, the combination of high appreciation, low inventories, and continuing tight credit conditions is making home ownership a stretch few can afford. As a result, first-timers made up only 32 percent of buyers this year, down from 50 percent in 2010.

Yun predicts the relatively good economy will encourage a growing number of these young people to start households, but many of them will not be home owners. “As they’re coming out of their parents’ basement, they will be renters,” he says.

Rental housing is already seeing high increases in annual rent rates because of the large demand, so as more in the millennial generation form households, the trend in rental rate increases will continue, which could help fuel inflation even as energy prices stay down. Should inflation rise, short-term interest rates could rise as well, as could long-term mortgage rates, which would put another hurdle in front of younger buyers.

On the plus side, lenders are starting to loosen credit restrictions and there could be further loosening in the years ahead as lenders, credit rating agencies, and financial regulators adjust credit policies to accommodate the credit profiles of younger households.

For next year, Yun is forecasting about 6.25 million new and existing home sales, 1.4 million housing starts, 5 percent median home price growth, and an average mortgage interest rate of 4.5 percent, up from 3.8 percent this year.

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