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Realities of Real Estate: Important real estate trends for 2015

As soon as the year-end numbers come in, we’ll recap the performance for real estate in 2014. But for now, let’s look forward to the trends and market dynamics that are expected to shape real estate during the year that is yet to be.

First-time homebuyers

The tandem effects of the great recession and implosion of the housing market drastically changed traditional homebuying patterns. Normally, a vibrant real estate sector is maintained by a lifecycle that starts with new household formation and first-time homebuyers entering the market, who then trade-up to larger homes as the family expands and incomes grow, cumulating in downsizing, or the purchase of a second home for retirement. But, when the recession hit, the cycle was disrupted when a lack of jobs delayed initial home purchases and declining home values made it difficult, if not impossible, for existing home owners to trade up.

Recovery for the stock market and improving home prices have helped those looking to trade up or retire; however, the absence of first-time buyers has continued to be a tremendous drag on a real estate recovery. Typically, first-time buyers make up 4 out of every 10 home purchases, demonstrating the importance of these buyers to overall market strength. Unfortunately, in 2014 that share of first-time buyers fell to its lowest level in 27 years.

Fortunately, it appears that the environment necessary to inspire first-time buyers is beginning to take shape. The economy is finally starting to recover and job prospects are brighter. Plus, research shows that most Millennials, a group that will account for two-thirds of new household formations, still recognize the importance and value of home ownership. As a result, we expect that much of the growth for real estate in 2015 will be realized from the pent-up demand created by lower than normal levels of first-time buyers during the past several years.

Home Affordability

Primarily due to rock-bottom mortgage rates and falling prices, home affordability has been steadily increasing to record levels. But, that trend will most likely come to an end during 2015. Virtually all economists expect that the Federal Reserve Bank will increase the Fed Funds rate sometime during the next year. In simplest terms, the Fed Funds rate is what banks get charged when they borrow money. And if it costs bank more to borrow, they will pass that expense along to the consumer in the form of higher mortgage rates.

Right now, the rate on a 30-year fixed rate loan is just under 4 percent. The general consensus is that rates will begin to rise in mid-2015, reaching 5 percent by the end of the year. Historically, even 5 percent is a very low rate.

At the same time that mortgage rates are going up, home prices will also be appreciating. On average, prices are expected to go up anywhere from 4 to 5 percent. Growth in household income will offset some of the increase, but the net result will be a 5 to 10 percent decline in home affordability by the end of 2015.

As homes become more expensive, we expect that buyers will compensate by more frequently opting for adjustable rate mortgages (ARM’s) versus 30-year fixed rate loans. ARM got a bit of a bad rap during the housing crisis. But for many borrowers, ARM’s can make a lot of sense. Most people, most notably young, first-time buyers, usually don’t live in the same house for more than 5 or 6 years. So, a 5/1 ARM, where the rate will remain fixed for the first 5 years (currently at 3 percent to 3.25 percent) can make a house a lot more affordable than a 30-year fixed rate loan at 4 percent.

How we buy and sell

As technology marches on, the process by which we buy and sell homes is constantly evolving, and nowhere are those changes more pronounced than with the all-important first-time buyers. This generation is digitally plugged-in to the point that they’re fundamentally altering how real estate agents do business. In just the past few years, the proliferation of mobile devices, Internet connectivity and software necessary to power them has enabled buyers to search and evaluate prospective properties at a depth that was heretofore reserved for real estate professionals. These days, buyers don’t come to us wanting to know what’s available for sale; they already know that and have prepared a short list of homes they want to see.

Buyers still want agents to help with the selection process, but more and more, they’re looking to agents for assistance with other parts of the process, such as contract construction, negotiations, and all the hurdles that must be cleared to reach settlement, things such as inspections, title work and financing.

This has resulted in a shift of emphasis for the role of real estate agents. While we still open doors and show homes, that part of our job has become less time-consuming. More time is now spent in arranging the deal and shepherding it through to completion. For 2015, that trend will accelerate.

In sum, we’re very optimistic about 2015. The economy seems to be turning the corner, and an improving economy, along with better consumer confidence, will overcome the possible negative effects associated with rising mortgage rates. In an upcoming column, we’ll examine how we finished up in 2014.