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Practical Economics

Housing Market Gets Stronger in 2015

An improving economy and attractive home features will draw first-time and move-up buyers.

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House-hunting this year? Looking to sell your home? If so, you’ll have company. Home sales are in for a solid year, propelled by job and income gains plus an increase in household formations and pent-up demand.

See Also: It's Easier to Get a Mortgage in 2015

The reemergence of first-time home buyers, who have largely been sidelined since the recession, will help to fuel the housing recovery. 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%.

Following a slow start because of cold winter weather in many parts of the country, sales of existing homes will climb 7% to 5.25 million, from 4.9 million in 2014. Sales of new homes will also perk up, growing 19% to 523,000, from 439,000 last year.

Meanwhile, demand remains strong for multifamily housing. Vacancy rates are low, and renters who leave to buy homes are quickly being replaced by new tenants. Multifamily housing starts will reach 370,000 this year, up from 355,000 in 2014. Apartment builders will be especially busy in Houston, Dallas, Denver and Seattle.

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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. In another move that will help first-time home buyers, the Federal Housing Administration is reducing 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 this year, but won’t deter deter most prospective home buyers. Look for the 30-year mortgage rate to climb to 4.2% by year-end, from 3.8% in 2014.

Buyer preferences: Many first-time buyers say they want a two-story home with an open-concept kitchen, three bedrooms and two-and-a-half baths. They also value storage space, including walk-in pantries and linen closets, and a laundry room.

Note, too, that homes are getting slightly smaller overall, in part because builders are looking to smaller, less expensive homes to attract many young first-time buyers. The median size of a new home this year will be 106 sq. ft. smaller than the peak median of 2,491 sq. ft. two years ago.

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People buying upper-end homes put a home office, great room, media room and exercise room high on their lists of preferred features. Also, granite vanities, recessed lighting and exterior doors made from solid wood.

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 gains. Among the cities that will register strong price growth are Los Angeles, San Francisco, Seattle and Denver.

Prices for new homes will be especially robust because of low inventories. Newly built homes are selling in about three months, nearly 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.