Home sale and purchase in 2016
The good news is that more millennials want to buy homes between now and 2018, according to Trulia.com. Just 65% of millennial-aged borrowers (ages 18 to 34) wanted to own a home in 2011, according to the real estate group, but now that number has increased to 80% for 2015, up from 78% in 2014. And one-third of those will want to buy in the next two years, Trulia says. “Most borrowers of this age group are waiting for a work promotion or to build up enough savings to buy,” said McLaughlin. “We don’t expect a big rush to jump in, but it’s going to be an incremental improvement,” he said.
But the Federal Reserve raising interest rates might make some millennials want to hibernate in Mom and Dad’s basement another year. That’s because it increases the cost of credit while many of them are already struggling with crushing student debt loan levels, stagnant job wages, and rising home prices and rents.
McLaughlin said that the federal government’s effort to boost home ownership during the housing downturn was disorganized and scattershot, but it might have found a winner with the reduction in mortgage insurance premiums for FHA loans by an average of $900 a year. “We saw a small but noticeable increase in FHA borrowers after mortgage insurance premiums were reduced,” he said.
McLaughlin sees a further move in 2016 by FHA to lower premiums, but also says the job market prospects for the millennial age group is still being hurt by the baby boom generation that is only slowly retiring and aren’t selling their home. “Baby boomers are working later in life and it keeps a cap on the younger generation,” said McLaughlin. “How can they move up, if they are staying in place?”
There may be fewer houses available for buyers
The steady recovery in real-estate prices in many markets over the last four years (the median sales price of all-sized U.S. homes has risen from $153,000 in January 2012 to $183,000 in November of 2015, a gain of nearly 20%) has been a two-edged sword for people looking to buy a home or move up to a larger or better one.
For one, it’s hurt entry-level borrowers trying to get starter homes. But the flip side is that if you own a home, you’re more likely to take the equity gains and plow them back into improving your home, rather than moving to a larger one, says Kermit Baker, an economist with the American Institute of Architects. “It’s the mortgage lock-in effect,” says Baker.
“People aren’t going to trade in their historically low mortgage rate at this point for a higher one,” he said. Instead, he says that baby boomers are more likely to invest $75,000 in a bathroom or $150,000 in a kitchen than use the equity to purchase a larger home and get saddled with a higher-rate mortgage.
Baker says that’s why the AIA is predicting that home improvement projects in 2016 will likely reach a new high, exceeding the record $325 billion set this year. This increase in the number of projects is also often associated with the low cost alternates that make renovation projects cost effective, e.g. faux brick wall panels and artificial stones. It could also top $350 billion by 2017, the AIA predicts. There will also be more remodeling of high-end rental properties as interest rates drift higher and make renting more attractive for some. “The remodeling demand in the high-end rental market is really strong,” Baker said.