First-Time Buyers to Return to U.S. Housing Market in 2015

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According to Realtor.com's 2015 Housing Forecast released this week, following years of retrenchment among prospective first-time home buyers and the dampening effect it has had on the recovery of the housing market, first-timers will return to the market in 2015.

See related story: NAR Reports Significant Decline in First-time Home Buyers, at 30-Year Low

"The residual financial effects of recession-driven job losses and subsequent unemployment have impeded millennials' entry into the home-owning market. In 2015, increases in employment opportunities will empower younger buyers to return to the market and fuel the continued housing recovery," said Jonathan Smoke, chief economist for Realtor.com. "If access to credit improves, we could see substantially larger numbers of young buyers in the market. However, given a high dependency on financial qualifications, this activity will be skewed to geographic areas with higher affordability such as the Midwest and South."

Top 5 Housing Predictions for 2015 by Realtor.com

1. Millennials will drive household formations: Both population and households have grown at a slightly higher pace in 2014 and this trend will continue in 2015 with modest improvement over this year's increases. Households headed by millennials will see significant growth as a reflection of economic gains. Millennials will also drive two-thirds of household formations over the next five years. Next year's addition of 2.5 million jobs and increased household formation will be the two key factors driving first-time buyer sales. 

2. Existing home sales will increase +8%: Existing home sales will grow as more buyers enter the market motivated by a clear belief that both rates and prices will continue to rise.  The increase in home sales year-over-year will be similar to 2012, but this time the composition of properties sold will be more normal with minimal levels of distressed properties. While the majority of housing activity next year will be driven by baby boomers preparing for retirement, millennials will account for 65 percent of first-time home buyer sales in 2015. 

3. Home prices will gain +4-5%: Low inventory levels and demand driven by improved employment opportunities will push home prices up next year. While first-time home buyers have many economic factors working in their favor, increasing home prices will make it more difficult to get into high priced markets such as San Francisco and San Jose, Calif.  As a result, first-time home buyer activity is expected to concentrate in markets with strong employment and affordability, such as Des Moines, Iowa; Atlanta and Houston. 

4. Mortgage rates will end the year at 5%: Mortgage rates will increase in the middle of 2015, as the Federal Reserve increases its target rate by at least 50 basis points before the end of the year. Thirty year fixed rate mortgages will reach five percent by the end of 2015. One year adjustable rate mortgages (ARMs) will rise minimally. Lower ARM interest rates will influence an uptick in buyer interest for adjustable and hybrid mortgages. While at still at historic lows, rate increases will affect housing affordability for first-timers trying to break into the housing market and will be another factor pushing them to less expensive locales. 

5. Home affordability will decrease 5-10%: Affordability will decline in 2015 by 5-10 percent, based on home price appreciation and increasing mortgage interest rates. This decline will be somewhat offset by increasing incomes. When considering historical norms, housing affordability will continue to remain strong next year.

"The growth expected in 2015 is widespread, but as we put together our forecast, ten local markets stood out as especially primed and ready for significant acceleration across housing metrics in 2015," Smoke said. "The markets on this list range from big cities with older housing stock, big and mid-size cities with substantial levels of new construction, and up and coming markets appealing to young professionals for their job growth and high affordability. Los Angeles and Washington, D.C., were selected for their anticipated increases in home sales and household formation. While Des Moines, Iowa may seem like an odd addition, it's incredibly high affordability and high levels of home ownership among millennials set the stage for strong housing performance next year."