Despite a weather-plagued slow start…The housing market is in for a solid year, propelled by job and income gains plus an increase in household formations and pent-up demand.  

Helping to fuel the housing recovery:  The reemergence of first-time home buyers, who have largely been sidelined since the recession.  The number of first-timers will edge up as a share of all purchasers of existing homes in 2015, from about 28% now to perhaps 30% or a bit above.  In good housing years of the past, the share was 35%.

Looser credit terms are luring more buyers, including millennials encouraged by the recent lowering of down payment requirements from 5% to 3% by mortgage insurers Fannie Mae and Freddie Mac.  Also, note a move by the Federal Housing Administration to reduce annual mortgage insurance premiums for FHA-backed loans to 0.85% from 1.35%.  It will save typical first-time home buyers about $900 in their annual mortgage payment…a big incentive.  But lenders will remain vigilant…no return to the sort of subprime lending that led to widespread economic havoc in 2007.  

Mortgage rates will tick up by won't deter most prospective home buyers.  Sales of existing and new single-family homes will rise by 7% and 19% respectively, from last year.  Consumer demand is perking up for low-end homes, including town homes and condominiums, as well as for homes at the higher end.  Home prices are continuing their upward momentum, with growth strongest in the western U.S., where a number of urban areas will approach double-digit gain.  Prices for new homes will be especially robust because of low inventories.  Newly built homes are selling in about three months, roughly half the typical time.  There's a dearth of buildable lots in many places, stemming from low levels of financing for land development that's holding back builders,  particularly small ones.  A shortage of skilled carpenters and other tradesmen is also hampering builders.

Demand remains strong for multifamily housing.  Vacancy rates are low, and renters who leave to buy homes are quickly being replaced by new tenants.  Apartment builders will be especially busy in Houston, Dallas, Denver and Seattle.

New home trends:  For young first-time buyers, an open-concept kitchen, three bedrooms and a separate laundry room are high on most wish lists.  For upper-enders, a home office, great room, media room and exercise room rank among preferred features.  Both groups want highly energy efficient homes.  Homes are getting smaller overall.  The median size of a new home this year will be 106 square feet smaller than the peak median of 2,491 square feet two years ago.

Source:  The Kipling Letter – Vol. 92, No. 9