2016 Real Estate Predictions
With the new year (and part of January) behind us, many are looking forward to what 2016 holds for the real estate world. In this article, we discuss Esquire Real Estate Brokerage, Inc.’s 2016 real estate predictions.
Recap Of 2015 Real Estate Predictions
Last year, we discussed predictions from a variety of sources, including Home Buying Institute, Realtor Magazine, California Association of Realtors, Mortgage Bankers’ Association, Freddie Mac, and Zillow. In sum, they predicted increased mortgage interest rates to an average of between 4.5% and 5%, slowed increases in home prices, decrease in home affordability, and a decrease in foreclosures. In our 2015 Real Estate Predictions, we questioned whether interest rates would truly rise, due primarily to the relatively high unemployment rate of 5.8% at the beginning of 2015.
By the end of 2015, the average interest rate on a 30 year fixed loan was still just barely over 4% (4.01% to be exact). Throughout the year, the average rate on those loans never reached over 4.09%. In fact, the average rate was over 4% only 7 weeks out of the year, according to Freddie Mac. It was not until December that the Federal Reserve finally raised the target interest rate by 0.25%, despite earlier predictions that the Fed would raise the target interest rate in March or June. In short, most predictions on this issue were incorrect.
What Others Are Saying About 2016 Real Estate Predictions
As with the prior years, we first look to what other organizations are saying about 2016 real estate predictions. The following is a sample of 2016 real estate predictions from some well-established real estate organizations:
• Realtor Magazine – (1) Continuing increases in home prices, but at a slower pace; (2) younger average age of buyers; (3) more affordable new home construction opportunities; (4) increase in interest rates by about 0.60%; and (5) continually increasing rents.
• Home Buying Institute – (1) Continuing increases in home prices, but at a slower pace; (2) more significant increase in home prices in the West; (3) increase in interest rates up to about 5.1%; (4) more demand for homes due to increased employment; and (5) student loan debt will keep young buyers out of the market.
• Zillow – (1) Increase in median age of buyers; (2) low-income buyers will be priced out of the market; (3) highest median rents ever; (4) increased buying in suburbs due to un-affordable prices in urban areas; and (5) home value growth of about 3.5%.
Esquire Real Estate Brokerage, Inc.’s 2016 Real Estate Predictions
Our primary issue with the above predictions is, again, whether interest rates will rise as much as others are predicting. The Fed has expressed that it’s primary two concerns when considering raising the target interest rate are (1) unemployment and (2) inflation. Of course, it also considers economic growth as a whole. As a result, the prediction that mortgage interest rates will continue to increase, especially by as much as 0.60% by the end of the year, is not necessarily accurate, particularly given current low inflation rates and the tumbling stock market.
As shown by the below chart, the Fed has consistently viewed 4.8% to 5.0% as the target unemployment rate (unemployment rate shown by the orange line). That is the point where the Fed will consider increasing/decreasing the target interest rate (interest rate shown by the blue line) in order to stimulate/deflate growth, as evidenced by its recent action in December of last year. However, it has also expressed concern over recent dramatically low inflation (shown by the grey line). In fact, the recent increase in the target interest rate represents the first time in the past decade that the Fed has increased the target interest rate while inflation is below 2.0%.
Due to low inflation, the Fed will likely act extremely cautiously in considering further increases to the target interest rate. This is particularly true in light of the impact of stock market’s recent decline on the general economy.
As a result, while we generally agree that there is no reason for housing market gains to show any significant signs of slowing, we disagree with any prediction of significant increases in average mortgage interest rates in 2016. At most, we predict the Fed raising the target interest rate by 0.5%, but certainly no more than that. Low interest rates will likely continue to encourage buyers to enter the market, as will low unemployment rates.
If you would like to further discuss Esquire Real Estate Brokerage, Inc.’s 2016 real estate predictions and how we can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at firstname.lastname@example.org.