And what it all means for Home Sales, New Home Construction, Land Sales and Development

What is the 2015 real estate Market going to look like?  Will home sales finally soar, or are we instead going to see the market drop? Is 2015 finally the year when construction and development hit full recovery?  The Great Recession has left so many professionals in the real estate industry anxious for things to be like they were before the housing markets crashed, but hiccups in 2014 unfortunately showed that the road to recovery could be slower and longer than many hoped. What do the experts think is going to happen in 2015?

The good news is that many of the housing predictions for 2015 take a positive tone, and a lot of the good feeling is being driven by the health of the overall U.S. economy.  It helps that 2014 ended fairly solid, with the year being the strongest for the nation’s economic recovery since the recession. There is a general expectation for 2015 to continue this trend. A growing job market and lower fuel prices could help ignite consumer spending and the overall economy, with the nation’s GDP projected to expand by 3.1% — the highest level since 2005.

Here are 5 top projections and observations for the 2015 housing market, including some of our thoughts on how these trends may affect markets for new homes, existing homes, lot/land sales and real estate development.

1.    A New Year Brings Good News for Homebuilders

An improving economy is expected to mean better conditions for homebuilders and new home construction. Could happy days be here again for the homebuilding industry?

While there has been some growth in housing starts and construction since the end of the recession, in recent years the growth was largely driven by demand for multifamily housing. Most experts expect construction of single family detached homes to be the real story in 2015.

A number of economic conditions finally will break the logjam on new home construction, so expect homebuilders to be busier in 2015 under these improved conditions:

• Housing Starts – After steady, but slow, growth in 2014 experts estimate there will be a good jump in builders breaking ground on new homes in 2015 (with single family starts expected to grow 21%)
• Developed Lots – After being scarce for many years, more developed lots should be coming available for new homes and can help provide a critical part of the new home puzzle that has been missing for some time
• Household Formation – This key housing indicator that reflects when people are moving out after having lived with family or roommates is expected to improve through 2015, providing more demand for new homes
• Shift from Rental to Ownership – Rising rents and more stable Millenials means that new households may be on the market for buying a home rather than renting
• Improving Lending Options – Buyers are starting to see an easing of lending requirements that should provide improved conditions for borrowing the funds to buy a home

Homebuilders also have been held back in recent years by a shortage of skilled construction workers and pricey material costs, but it’s unclear whether some of these issues will ease in 2015.  In fact, the downside of a growing new home construction market is the likelihood of even greater constraints on labor and material availability.

In addition, housing affordability issues have affected new home sales – builders will need to supply affordable new home options that include appealing features that can excite buyers and broaden the Buyer base.  For one, homebuilders can drive demand for new homes by offering updated designs and desirable high-tech features that can’t be found in older homes. Low housing inventories will help builders when they are able to deliver an affordable product that can be an attractive choice for buyers in low inventory markets.

2.    Demand for Lots and Land Increases to meet New Home Growth

The story for several years in homebuilding has been the lack of available lots for building new homes. The downturn cut off development funding and effectively clogged the lot development pipeline, causing the inventory of high-quality finished lots to dwindle over time. While much of the recent focus for homebuilders has been constructing high-end homes on the available “A” lots, there has been very little development of other new lots – especially ones that are suitable for less lavish homes.

Expect continuing demand for new homes and improving lending options, to help start opening the lot and land development logjam.  The residential real estate development cycle is dependent on homebuilder demand, and when times are good for builders they also tend to indicate that good times are coming for developers – ultimately, the fates of home builders and developers are deeply entangled (see this article to learn more about the real estate development cycle and markets).

So a more positive homebuilding outlook for 2015 (and beyond) suggests that real estate development is getting ready to kick back into a higher gear.  Because of a changing buyer profile, expect the development trend to transition from high-end A lots to other developed lot options that will allow builders to fill the need for less expensive housing options too.  After several post-recession years of little land development activity, many markets already are seeing new housing communities in the land development pipeline and more new projects are expected.  This is good news for builders who need lots, developers who want to increase their business, and lot and land sellers who have been waiting for buyers to get active again.

3.    Home Price Affordability will Stabilize

Home prices increased too much too soon leading into 2014 as low housing inventories continued to drive up prices. And while an increase in home values is great for existing homeowners who wish to sell (and those who just need to get some air with an underwater mortgage), rising values can price many buyers out of the market.  Normally rising home prices would motivate more buyers into the market, but a combination of low inventories, slow job growth and a sluggish economy continued to cause a market disconnect. Prices increased so much over the past few years that consumer incomes could not keep up.

An easing of housing affordability may occur in 2015, as incomes grow to meet pricing.  Experts still predict stable growth in home values this year because the inventory of both existing and new homes for sale will continue to be tight. It’s fair to say that there may be some ups and downs in home values through 2015, with some anticipating an overall gain for the year of a more moderate 2 to 3%.

Flatter pricing may affect margins for builders, but the overall new home market outlook should be more promising and the improving economic conditions and housing affordability should expand the market to include a larger buyer base. As for existing home and vacant land sales, overly optimistic pricing by sellers can be a curse – but if more sellers accept that the easing of valuations require them to be more realistic when setting a sales price, sales volumes and closings could steadily increase.

4.    Finally, a Sustainable Home Buyer Profile Emerges

With the passing of time and improving economic conditions, not only will changes occur in 2015 that will result in a healthier housing market, but these changes also should bring about a more stable home buyer profile.

For many years after the downturn, market conditions resulted in sinking home valuations, foreclosures and distressed sales, and this instability led to a shift in housing preferences and an influx of non-typical homebuyers. The flood of foreclosures caused by the financial crisis attracted an overabundance of home buyers who often were seeking rock-bottom prices for rental investment opportunities, rather than a place to live. These weren’t just individual investors, many of the purchases were made by institutional investment firms seeking to convert single family homes to rental housing.

In addition, members of the Millennial Generation, who were next in line to become the up-and-coming generation of first-time homebuyers, grew wary of homeownership or simply were not able to find jobs or financing to follow through with a home purchase. Instead, a large portion of this generation has had a tendency to rent or live with parents over the past few years – a boon for apartment developers, but not so great for parents hoping for an empty nest. This has resulted in a lower volume of first-time homebuyer sales.

In contrast, it’s been easier for wealthier households to make home purchases during this time period. This means a disproportionate amount of new home construction has been focused on high-end, expensive homes. As one homebuilding expert described it, the housing recovery in 2014 “defined itself around an A-plus lot, high-end, discretionary buyer”.

The disruption in the typical home buyer profile after the start of the downturn has been an issue, but it is good news that a number of changes are anticipated for 2015 that can help us see the emergence of a more stable and sustainable home buyer profile:

• For one, foreclosures and short sales are expected to decrease significantly in 2015. Foreclosures are expected to fall to normal levels in 2015, which will help stabilize the housing markets and drive out some of the bottom-feeding investor buyers.
• The Millennial Generation is coming of age, and this is expected to be good news for home sales.  The Millennial Generation is even larger than the Baby Boomers, and now these young adults are starting to find job security, are getting married and are starting families. The Millennials are a big part of new household formation growth that is expected nationwide.  About 65% of first-time home buyers are part of this group of Millennials.
• Improving lending conditions should allow a broader base of first-time and middle-market home buyers to make purchases.

This growing, stable segment of home buyers is great news for those who work in new home construction, existing home sales and land development.

5.    Loan Market and Mortgage Changes are Coming

It’s possible that the biggest issue that has been holding back a housing recovery is the lack of available credit.  A consequence of the financial crisis has been an era wrought with strict underwriting criteria for borrowers and an unwillingness of the banking industry to participate actively in many construction-related loan products. Whether it is a consumer applying for a mortgage to purchase a home or a real estate developer seeking acquisition and development financing for starting a new housing development, the financial crisis shut down the availability of many types of loans and this still has not changed for most of the last four years. As one commentator at the Wall Street Journal noted:

“It’s no surprise to anyone who’s tried to buy a house in the last five years that the process is much more burdensome. Banks are being very careful to document a borrower’s income, the source of their down payment funds, and anything else that might cause them to face higher costs should the loan later default.”

We certainly don’t need a return to the dangerous lending policies that helped cause the financial crisis, but the post-recession underwriting requirements have blocked many potential borrowers from getting loans, prolonged the recovery for single family housing markets and dramatically affected the ability of the home construction and development industry to bounce back.

On the flip side, while credit has been hard to find it certainly has been cheap. We’ve experienced historically low mortgage rates since the economic downturn, which has been great for those who have been able to buy or refinance during this time period.  Experts predicted rising interest rates for 2014, but rates continued to stay low and even dropped to 4% by the end of the year.

Expect changes to continue in the lending markets in 2015 that could make it slightly easier for borrowers to get a loan. The availability of mortgages already has been steadily rising over 2014 (with solid increases to the Mortgage Availability Index in both November and December), plus both Fannie Mae and Freddie Mac announced new mortgage programs that allow down payments of as little as 3% that are intended to make it easier for well-qualified individuals to get mortgages for purchasing homes.

Unfortunately, however, the low interest rates are likely to end soon. For one, rates really have nowhere to go but up at this time. In response to an improving economy, the Federal Reserve already has indicated that it will raise the federal funds rate in 2015 and that it is backing off of mortgage buying, which will lead to an increase in mortgage rates. Some expect the rate increase to come in mid-2015, with the 30-year fixed rate reaching 5% before the end of the year.

The new home and construction market will start to look different in 2015 thanks to some of the easing in lending standards. Both existing home sales and new home sales can benefit from the increased availability of financing. When the lending restrictions ease, expect new home construction and development to ramp up to meet the changing home buyer profile and for a broader range of for-sale housing options to be offered by builders that will include starter and mid-level homes.

Many of these 2015 predictions will play out as the year unfolds. In the meantime, it’s always good to keep in mind that housing markets are different everywhere. Some of these predictions are anticipated to play out over large parts of the nation, but real estate is very local and can be affected by many other factors that are particular to your markets or sub-markets. Likewise, many unforeseen conditions can affect housing markets, like the severe winter weather across a large part of the nation in early 2014 that negatively affected construction and housing sales. Other unknowns include geo-political events, the stock market and more.  Plan to keep an eye on many of these factors as the year develops.

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