The New Normal Brings New Opportunities

2015 Real Estate Outlook

Introduction

2015 promises to be a great year for real estate as it will arguably be the first year the whole nation gets back in the game and we will witness a unique alignment of economic and market forces. The economic trifecta of jobs and wage growth, low oil prices, and low interest rates means more money in consumers’ pockets which translates into higher consumer confidence, which is just a fancy way of saying “housing happiness.” In addition to traditional market demand, there are three key market forces and demand signals at play. First, the sheer number of boomers is going to result in healthy transaction volume, especially in areas where they may want to retire. Second, first-time buyers will probably beat their historic average of 40% in terms of participation, and third, many boomerang buyers who sat out the mandatory period since the crisis could get a second shot at the American Dream.


Home Prices Rise Slowly

We are witnessing a move out of the rapid recovery mode into a more stable phase that economists are calling the new normal, where prices are returning to more traditional market-driven characteristics since the 2008 crisis. While prices still increased, they did so at a slower pace and we expect that modest upward trend (of 4-5%) to continue in 2015. However, even though prices won’t rise as fast, they will rise faster than overall incomes.


Inventory is Rebalancing

In the past year, we have seen a healthy trend of inventory balancing across markets, where demand and supply are starting to find common ground given the current market price points. Months Supply of Inventory (MSI) is a good metric to track the health of inventory where a low MSI signals a sellers market and a high MSI signals a buyers market with a general balanced market indicated by an MSI of 6 (months). New inventory is coming, albeit slowly, but it is crucial to note that a more balanced market will be smoother sailing for everyone with less overall volatility in pricing and emotions, both for buyers in search of a competitive advantage, and for sellers who turn around and become buyers themselves.


Mortgage Rates Poised to Increase

Economists have predicted rate hikes for the last 24 months, but the existence of new influencing factors may support an upward movement in rates in 2015. Most importantly, the Fed signaling that QE3 (the third iteration of short-term quantitative easing through the purchase of securities) is over presents a key sign of economic health and a move away from a focus to keep rates low and allow for it to start to move with the improving health of the overall economy. The Mortgage Bankers Association says there is plenty of reason to believe a short-term fund rate hike could come by mid- 2015, pushing mortgage interest rates up with it.


Rents Projected to Rise

As the housing market stabilizes, job growth and wage growth combined with new household formations especially in the growing millennial demographic will drive rents higher as families save for their down payment and start to understand the mechanics of accessing credit and qualifying for a loan in the post-2008 crisis world. Additionally, the rapid price escalation has been so tremendous from the rebounding markets over the last 24 months, that many buyers are still priced out especially in metropolitan areas and luxury markets, and are forced to rent. This varied yet strong demand for rental property will drive rents higher in 2015 especially in multi-family environments, at a rate that is greater than the increase in home prices or even interest rates.


Wildcard: Geopolitics

Current geopolitical factors internationally are helping keep interest rates down in the United States. Several factors are influencing the global currency markets including the US Dollar such as weakness in China and Europe, instability in Russia and Ukraine, and Iran’s Nuclear Diplomacy discussions to name a few. As the interconnectedness of world economies grow, the geopolitical issues across the world will strangely seem to have an intermittent impact on the price of our home. However, as residents of the United States, we are more fortunate than most citizens of the world as we enjoy the benefits of various freedoms and a free market economy which is arguably the most efficient in the world. We will continue to see international demand for US real estate, especially in metropolitan areas and luxury markets, as America is viewed as a “flight to quality”.


Outlook Summary

The good news is that the housing market will be driven more by underlying (and local) economic fundamentals such as job growth, incomes, and household formation rather than macro-economic (national) factors such as interest rates and price recovery trends. The bottom line is people need a place to live and the alternative to home ownership is renting. We know that rents are going up faster than both home price growth and interest rates. With the return of various flexible mortgage products, the importance of the mortgage interest deduction is further underscored in a rising income tax landscape. Rates are not going to be an obstacle and neither are prices. It is however going to just take some time for everyone to grasp the new normal in real estate, but it does promise to serve up an opportunity for (almost) everyone who is open to it.