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Compared to previous years, the real estate industry now seems to be in a solid grip. With the economy continuing to progress, more jobs will be available and this means more money for people to spend. They will be able to upgrade their homes or purchase a new one. Take a closer look at the trends that will shape the future of real estate in 2016.
Builders Will Focus on Lower Price Points
Builders have focused on producing expensive housing units due to higher land costs, uncertainties about the level of demand in the entry-level market and limited labor. This strategy has caused the prices of new homes to increase faster than the costs of existing homes. Builders were able to enjoy profits, but their potential for growth was limited as they avoided the entry-level market. However, this would change in 2016.
New-home prices have already declined this fall. Builders are also finding the first-time buyer section more attractive with the improvement in credit access. This 2016, builders will offer more affordable housing units. The availability of such units will depend on the location, but consumers can expect to find more affordable properties this year.
Office Landscape Investment
The economy’s recovery has resulted in job growth, strengthening the commercial sector as well. Open office plans are now more common. In 2000, the average square foot for every worker was 253. This is expected to drop to 138 by 2020 and will only continue in the following years. Existing spaces will be redeveloped and coworking will further increase. Development in the office landscape will continue.
Millennials Will Move the Market Once More
Millennials became a strong force last year and it won’t change this 2016. Their large number and improving personal financial states will allow consumers between 25 and 34 years old to move the market once more. While most of those consumers will be first-timers, other generations will have a large role as well.
The real estate market will be affected by two other generations – the older boomers entering or considering retirement and the Gen Xers whose finances are steadily improving. Most of these consumers already own a property, so they will play two roles – improving the market as a buyer and as a seller. Older boomers are already in or thinking about retirement and want to economize and secure lower living costs. Gen Xers, on the other hand, are earning well and can move to better neighborhoods. These two generations will occupy much of the residential record that millennials want in order to start a family of their own.
2016 is also the best year to sell since most of them will both buy and sell. Inventory is moving faster since supply is still extremely low. With price appreciation in 2016 slowing to a more normal growth rate, postponing won’t give significantly higher values and will lead to higher mortgage rates on new purchases.
High-cost Markets Will Be Affected by Higher Mortgage Rates
Mortgage rates went up in 2015, but they also dropped. The same volatility can be expected in 2016, but the move made by the Federal Reserve to make interest rates higher will lead an upward trend for mortgage rates.
Consumers will have several methods to reduce their mortgage rates and make it more manageable for them. Higher mortgage rates, however, will lead to higher monthly payments. Debt-to-income ratios will go higher as well. High-cost markets will be the most affected by this change. Higher mortgage rates will lead to fewer sales. The effect will be smaller across the United States as the increase in mortgage rates will encourage more existing homeowners to sell their property and buy a new one before rates increase any further.
Niche Lenders Will Be More in Demand
A diverging lending market is changing the real estate market as well. Larger projects need more funds and lead time. This forces developers to depend on larger banks. Larger institutions are quite constrained by new regulations, but community lenders and smaller banks are filling the gap. Those who are looking for a loan are caught between the two options. Choosing a side is very important.
Increase in Interest Rates
Interest rates will increase this 2016. The forecasts may differ, but there’s a huge possibility that the Federal Funds Rate will go up at least to one percent this year, with the treasuries of ten years increasing towards the three percent mark. The interest rates may be low for now due to various factors such as the strong dollar and limited inflation. However, the Federal Funds Rate will probably consider the effects of every move before adding more friction to the existing economic growth trends.
Already Exorbitant Rents Will Be Even Higher than Home Costs
More than 85 percent of U.S. markets have rents that are higher than the 30 percent income of renting households. The rents are increasing at a faster pace than home costs. Buying in over three-quarters of the United States is a more affordable option for consumers. For most renting households, however, buying isn’t a short-term option due to limited savings, lack of stable income that’s necessary to be eligible for a mortgage and poor household credit scores. This trend will have a negative effect on the housing market in the future. This can only be improved if more affordable rental housing will be constructed and if renters will be given more means to become homeowners.
These are just some of the trends that will affect the real estate industry this 2016. This year, home prices and sales will see healthy growth, but it will be at a more sluggish pace than in 2015. We’ve seen abnormal trends in previous years, but we are finally seeing indications of more normal market conditions. New construction is starting to return to more traditional levels, increase in prices is at a more normal rate and distress sales will no longer play a large role. In general, we’ll see a more balanced real estate market in 2016.
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