2015 Real Estate Market Forecast

As usual, I’m a little tardy in posting my annual market forecast.  I assume everyone else’s Januarys are as hectic as mine, so its likely you wouldn’t even read it if I were to send this out at the turn of the New Year.  By more happenstance than design, my annual forecast release in early February has worked out over the years, as more readers view it over any other MattsMemos.com post during the year.  I’m honored you find entertainment, and perhaps a little insight, from this annual tradition.

Forecasting is a fancy word for guessing!

2014 Year In Review

Before I get ahead of myself, let us review 2014’s forecast and see how my predictions stacked up to what truly transpired.  In short, I forecasted we would see stabling home prices due to a healthy balance of supply and demand of traditional buyers & sellers.  I can’t help but brag for a moment that this was the exact script for last year’s market.  Sacramento homes appreciated less than 5% (Folsom was less than 2%), and the market maintained between 1.8-2.7 months of inventory (this is a balanced level).  Short sales and REO sales accounted for less than 15% of Sacramento area sales.  All of these signs clearly indicate a return to normalcy for our real estate market.

My accurate aim stops abruptly, however, when you peek at last year’s interest rate forecast.  With The Fed easing and ultimately exiting their campaign of buying mortgages (known as “quantitative easing”), I anticipated 30-year fixed rates would steadily climb through the year and end up around 5%.  In actuality, rates somehow defied logic and plummeted back down well below 4% towards the end of 2014.  There are a number of factors that led to this, but the main cause was the falling price of oil.  When oil costs less, so does everything else as it costs less to produce and transport goods.  With little to no threat of rising costs of goods, interest rates on mortgages tend to slip lower as investors are not worried about inflation.

Graph courtesy of ycharts.com
Graph courtesy of ycharts.com

2015 Market Forecast

There is much “writing on the wall” that makes me very excited for 2015’s real estate market.  Compared to the meager demand of buyers seen in 2014, I anticipate many more first-time & “boomerang” (folks who lost a home to short sale or foreclosure who are now looking to purchase again) home buyers entering the market.  Why?  Rent prices are skyrocketing everywhere, thus making it less financially attractive to rent versus own.  Also, lending guidelines are becoming more favorable for folks with small down payments.  For example, FHA financing (which allows down payments of as little as 3.5%) slashed monthly mortgage insurance rates by more than 35% last month.  When combining this drop with the overall decline in interest rates, homes have instantly become more affordable for most buyers.

With more first-time & boomerang buyers on the scene, entry level home prices will appreciate more rapidly than other segments of the market, but the tepid pace of entry level home sales will have a positive ripple-effect on larger homes as more folks look to move-up.  I boldly predict we will see more homes sold this year in the Sacramento area than we have in over 5 years.

As always, interest rates will be a big wild card.  It always seems an unpredictable global, political, or financial event causes rates to swing in the opposite direction conventional wisdom suggests.  Will 2015 play out the same way?  Perhaps, but given the low cost of oil (which keeps rates low) and the sputtering pace of the stock market (if stock market does poorly then rates tend to fall) I would be incredibly surprised to see rates increase more than ½% from their current marks.  30-year rates are below 4% presently and 15-year rates are inching towards 3%.

All in all, the real estate market looks rosy.  Perhaps that’s due to the shade of my glasses, but the combination of hungry buyers, willing & able traditional sellers, and accommodative interest rates and lending guidelines make it hard to believe 2015 will be a poor year for the market. As always, I’m thrilled to have a front row seat while it plays out, and I’m honored to have your trust to help navigate your real estate affairs.

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