Since we have just started into 2015, we thought we should do as we have the past few years and take a look at the real estate market predictions for the coming year. Last year, prices rose by around 3.5 percent, near many experts’ predictions but significantly lower than 2013. Like last year, the biggest uncertainty in housing affordability may be interest rates, which are still near historic lows but could climb significantly.
For 2015, experts are predicting housing price gains similar to what we saw last year. A Kiplinger report predicts gains around 3.5 percent this year, comparable to last year, while IIHS-Global Insight predicts a slightly smaller gain of 2.8 percent. Like the year before, the continued gains in housing prices make new home construction attractive to many buyers. According to Kiplinger, new home construction starts could increase by as much as 25 percent this year as buyers seek the conveniences of a newly-built home. Despite this increase, the number of new housing starts will still be 30 percent below peak levels and construction starts will likely not set a new high until 2017.
One factor that is helping to drive an increase in home sales is skyrocketing rental costs. During the recession, the number of renters increased greatly. The increased demand for rental units has increased rents, with the average renter now spending about 30 percent of their income on housing. In contrast, the average homeowner only spends 15 percent of their income on housing. Now that employment is rising and more homeowners can save for a down payment, buying is a very attractive option. Furthermore, Fannie Mae and Freddie Mac are lowering their requirements for down payments from 5 percent to 3 percent, which will further increase the pool of buyers.
The major uncertainty in the real estate markets is the future of interest rates. Since the Federal Reserve announced an end to its Quantitative Easing program, interest rates have been predicted to rise. Last year started with interest rates around 4.5 percent, with experts predicting a rise to 5 percent or more by year end. Instead, interest rates fell throughout last year and currently average about 3.6 percent. Nevertheless, many experts are predicting that interest rates will rise later this year and may reach 5 percent by year’s end. For a home buyer with a $300,000 loan, this increase would mean a $200 a month increase in loan payments, so securing a loan at today’s low rates would be a good idea.
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