Blom: Residential real estate: Three things to watch in 2015
Inventory, mortgage rates and demographics will play key roles
The Columbian
Published: January 21, 2015, 4:00pm
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Demand for homes in Clark County remained solid into the winter months, and the arrival of more millennials into the market could increase pressure on an already-low housing inventory.Photo Gallery
Three trends will shape the residential real estate market in 2015, both nationally and locally.
The start of 2015 is positioned to continue to be a seller’s market, as a result of low inventory, growing sentiment that interest rates are going to rise by the end of the year, and new buyers entering the market. By the end of the year, higher rates could negatively impact the market. This impact would be amplified if millennials do not enter the market as they are expected to do.
Inventory: In most years, home sales peak in July or August then decline in the fall. This year, closed sales in Clark County remained strong in the fall months. Pending sales, a leading indicator of closed transactions, declined slightly in September and October, but not as much as previous years. Foot traffic, the number of buyers out looking at homes and the next wave of pending sales, increased in September for the third straight month. Put together, this means there were more people buying homes, under contract to buy homes, or hoping to buy a home soon than in any fall we have seen since the boom.
When it comes to people selling a home, it is a different story. In May, more new homes came on the market than any month since 2008. However, the number of listings coming on the market has steadily dropped since then. Lots of buyers without many listings results in low inventory and upward pressure on prices.
One of the practical impacts of this for buyers in the market is the challenge of multiple-offer situations. This is particularly evident for listings below the median sales price, which was $255,000 at the end of November. I have had several clients write strong offers on multiple properties but lose out to over-full-price offers before finally getting into contract. The National Association of Realtors annual survey of buyers and sellers found that finding the right house was the biggest challenge for most buyers. Multiple-offer situations only makes that obstacle greater.
Mortgage rates: Low inventory may push prices up, but interest rates will reduce home buyers’ purchasing power in 2015. Several surveys of the mortgage industry (Fannie Mae, Freddie Mac, Mortgage Bankers Association) found that by the fourth quarter of 2015, most lenders believe rates will be over 5 percent. At 4 percent, the principal and interest on a $200,000 loan is $955 month. At 5 percent, a $180,000 loan would cost a buyer $966 month.
That loss of purchasing power is relatively consistent across price point. If rates go up 1 percent, a buyer who could afford $325,000 now would need to find a house under $300,000 to keep the same payment. A $450,000 buyer today would be able to spend around $400,000. While low inventory may push prices up, if buyers cannot afford the payment, sellers will have to reduce their price to get a contract.
Demographics: The absence of a state income tax and comparatively better housing prices has made Clark County a destination for retirees from California as well as Oregon. The impact of this is evident in the types of houses being built: main level living homes are selling quickly at almost every price point. The inventory of homes with the master bedroom on the main floor is approximately 10 percent lower than for homes with the master bedroom upstairs. The out-of-state migration and demand for this type of home will remain strong in 2015.
The change we may see in 2015 will be the millennials entering the real estate market. This demographic has graduated college with more debt than their parents and entered a more challenging job market. The percentage of home purchases by first-time homebuyers, even during the market recovery, has been lower than the historical average. Nationally, this trend appears like it may be starting to change. Locally, the millennials have mostly recovered from the recent depression in terms of employment numbers, but their wages remain lower than they were before 2007. If this group enters the local market in 2015, it will put more pressure on already-low housing inventory.
In summary, there are several factors that could lead to prices continuing to increase in 2015 (low inventory, new buyers entering the marketplace), but rising interest rates may dampen buying power, keeping prices relatively stable. Regardless of how these forces interact and play out in the next 12 months, there is little fear of a second housing bubble. At worse, housing prices will remain stable or rise slightly. Total sales activity will depend on the number of people who make the decision to sell.
