This year may have marked the best year for the housing market since 2007, but the market will likely get even healthier in 2016, according to a recent real estate forecast by realtor.com®. One of the main drivers behind the brighter 2016 is the projection that employment will continue to grow, which means people will have more money in their wallets and that they will have the ability to purchase their first home or upgrade to a new one.

Take a look at the trend that will have the greatest impact on the housing market this upcoming year according to Realtor.com®:

1. We will return to NORMAL
In 2016, you should expect to see a healthy growth in home sales and prices – at a slower pace than in 2015. But don’t think that the slow pace means there is a problem, it just means the market is returning to ‘normalcy’.  “We’ve lived through 15 years of truly abnormal trends, and after working off the devastating effects of the housing bust, we’re finally seeing signs of more normal conditions,” says Jonathan Smoke, realtor.com®’s chief economist. New construction and distressed sales are expected to return to more historical levels, and home prices are expected to follow at “more conventional rates that will be consistent with a more balanced market.”

2. A Mix of Generations will shape up 2016
Young adults’ presence on the housing market has been largely predicted for years, but this upcoming year may finally be the year they make a literal move…into their own home. Millennials represented nearly 2 billion sales in 2015 – one-third of home buyers. They are expected to continue to be a major buying pool in 2016 with the majority of buyers between ages 25 and 34 expected to be first-time home buyers next year. Don’t forget about the two other generations, Gen Xers and older baby boomers, will also have a big presence in 2016. Gen Xers are still financially recovering and older baby boomers are now thinking about or entering retirement. Realtor.com® notes. “Since most of these people are already homeowners, they’ll play a double role, boosting the market as both sellers and buyers,” Smoke notes. “Gen Xers are in their prime earning years and thus able to relocate to better neighborhoods for their families. Older boomers are approaching (or already in) retirement and seeking to downsize and lock in a lower cost of living.”

3. New-home construction will focus on affordability
Builders have been faced with higher land costs, limited labor, and concerns about the demand of the entry-level market. As such, they have shifted to constructing more higher-priced homes, which has caused new-home prices to rise significantly faster than existing-home prices. In 2016, they likely will shift to more affordable product to cater to the entry-level buyers. “We are already seeing a decline in new-home prices for new contracts signed this fall,” notes Smoke. Access to credit is improving, which means the first-time buyer segment is looking more attractive to builders.

4. Higher mortgage rates
In 2015, mortgage rates went up, but then they went back down. For this upcoming year, you should expect similar volatility for mortgage rates. But the recent move by the Federal Reserve to guide interest rates higher should push in a reliable upward trend in mortgage rates. The 30-year fixed-rate mortgage will likely end 2016 about 60 basis points higher than today’s level. “That level of increase is manageable, as consumers will have multiple tactics to mitigate some of that increase,” Smoke says. “However, higher rates will drive monthly payments higher, and, along with that, debt-to-income ratios will also go higher.” The markets with the highest home prices will see the effects from the higher rates the most.

5. Rents to go up even higher
Rental costs are skyrocketing, and the costs are likely to only go up in the new year. More than 85% of the nation’s markets have rents that exceed 30% of the income of renting households. “Rents are accelerating at a more rapid pace than home prices, which are moderating,” Smoke says. Therefore it is now becoming more affordable to buy in more than three-quarters of the country. Unfortunately, the majority of renting households don’t foresee a near-term option to purchase a home due to poor household credit scores, limited savings, and lack of documented stable income of the kind necessary to qualify for a mortgage today.

Source: “The 5 Real Estate Trends That Will Shape 2016,” realtor.com® (Dec. 16, 2015)

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