It’s been nearly a decade since the housing bubble burst and home values have yet to come back. But 2015 offered great strides toward full recovery, with small reminders of a still-recuperating market.
Home prices are up year-over-year and new home sales are on track for the best year since 2007. But the share of first-time homebuyers remains at the lowest level on record, while the homeownership rate slumped to a 48-year low earlier this year.
What will 2016 hold for homebuyers, sellers and renters? Here are the top real estate trends to watch for next year.
1. Home prices will continue to rise…moderately.
Economists and housing experts surveyed by Zillow expect home values to grow an average of 3.5 percent with most markets experiencing modest gains. That’s closer to historical averages and more sustainable than double-digit increases. However, some economists are worried that price appreciation may be approaching bubble territory in some hot markets like San Francisco, Denver, and Dallas.
2. Interest rates will inch up.
Economists widely agree that the Fed will increase its fed funds rate gradually throughout the year. Rates on adjustable-rate mortgages, which are tied to the prime rate that tracks the fed rate, will react immediately to a Fed hike. The rate on the 30-year fixed mortgage will increase slower, because it follows the yield on the 10-year Treasury, rather than the fed rate.
Rates on a 30-year mortgage currently stand at about 4 percent, up from record lows but still extremely attractive by historical measures. The Mortgage Bankers Association expects rates to reach 4.5 percent in 2016.
While some worry that higher interest rates would dampen the housing market, job security and wage growth are larger factors on home activity than interest rates.
3. First-time buyers will continue to struggle.
Part of the reason for the muted housing recovery is the lack of first-time buyers. These buyers—who traditionally fuel the market—have had difficulty saving for a down-payment due to stagnant wages and high rents. “The investors came in and helped accelerate the housing recovery by being willing to buy when the market was bleeding, but they have pushed up home prices rapidly in some markets, and all of the sudden those markets are unaffordable for the traditional, first-time buyers,” says Daren Blomquist, vice president at RealtyTrac.
The median age of first-time homebuyers—currently at a record-high 33—will head even higher next year, according to Zillow. Another headwind facing first-time homebuyers: Prices for entry-level homes are increasing faster than prices at any other price level, according to CoreLogic. That’s because developers have been building larger, more expensive houses rather than starter homes.
4. Credit will get—a little—looser.
While the days of no-doc loans and drive-by appraisals will likely never return, the pendulum is inching closer to center after several years of tight credit restrictions. The average FICO score on all closed loans in the third quarter was 723, the lowest level in at least four years, according to Ellie Mae. Two years ago, the average score for denied applications was 729.
Banks may be even more willing to work with homebuyers over the next year as the volume of refinances falls as interest rates rise. “There will be more competition for borrowers,” says Frank Nothaft, chief economist at CoreLogic. “We may start to see more flexibility in credit standards and underwriting.”
5. It will still be cheaper to buy than rent.
Rental rates have risen even faster than home prices in some markets. Buying a home is 36 percent cheaper than renting nationwide for millennials and now is the best time to buy since 2012, according to Trulia. Buying is cheaper than renting in every one of the country’s 100 largest metro areas. The disparity could likely grow as rents are expected to increase by 8 percent next year, according to a Rent.com survey of property managers.
6. The suburbs will make a comeback.
The suburbs are once again becoming a potential destination for buyers as downtown living increases and Millennials start families, according to a new report from the Urban Land Institute. The most attractive suburbs are close to a city and have walkable Main Streets, job opportunities and public transportation. In the largest metro areas, more than four out of five jobs are located outside of the center-city core.
7. Buyers will want green and smart homes.
Despite the higher costs, home builders and remodelers are increasingly incorporating eco-friendly features into projects to meet growing demand largely from affluent Baby Boomers who prioritize energy efficiency, a healthier indoor environment and durability. More than half of builders and 39 percent of remodelers say they are working on green projects, according to a study from Dodge Data & Analytics for the National Association of Home Builders. Those percentages are expected to rise over the next five years.
Sellers that don’t want to invest in full-scale renovations are turning to smart thermostats and lights that can be controlled by smartphones to pump up their eco appeal. “It’s a great way for sellers to differentiate their properties from others on the market,” says Budge Husky, chief executive officer at Coldwell Banker Real Estate. “You’re not only getting the energy savings, but it becomes a lifestyle feature.”
8. Videos will be the new photos.
High-quality, professional photographs have become the norm for online listings. To stand out in today’s market, more sellers are working with their real estate agents to create virtual tours and videos to highlight their properties.
Videos can help create positive reactions and emotional connections to younger buyers accustomed to sharing photos and videos on social media. Los Angeles real estate agent Scott Tamkin has been using video game-like 3D tours to allow potential buyers who may be abroad to virtually “walk through” a property to get a real feel for it.
9. All-cash sales will continue to decrease.
About a third of home sales in August went to all-cash buyers, down form a high of more than 46 percent in January 2011, according to CoreLogic. That share will likely continue to decline in 2016, which is good news for mortgage-dependent buyers who have had trouble competing with all-cash offers in some markets.
10. New homes will come back big time.
New home construction was one of the hardest-hit industries after the housing bust. At their lowest point in 2009, developers had scaled back production by nearly 79 percent. They’re finally starting to ramp up again. Single-family starts increased 10 percent this year and are expected to rise another 23 percent in 2016, according to the National Association of Home Builders. That coincides with healthy sales. New home sales grew 15 percent this year and are forecast to jump 26 percent in 2016.