Real estate was on a fairly smooth ride for the majority of 2015, despite warnings that another housing bubble is imminent. With the arrival of 2016, it’s a good time to take a look at where the market is headed over the next twelve months. Here are some of the trends we can expect to see unfold.
1. Housing Prices Set to Climb At a Slower Pace
In the seven years since the 2008 market collapse, housing has made steady gains with home prices increasing by 17% over the last three years alone. In the most expensive housing markets like New York and Los Angeles, the jump in pricing is being driven by high demand and low supply. Home values, by comparison, have leveled off with properties appreciating an average of 3.3% annually.
Going into 2016, home prices will continue to rise, but it’s likely to be at a slower rate compared to previous years. According to CoreLogic’s recent Housing Price Index forecast, home prices were up 6.4% for 2015, but they’re only expected to go up by 4.7% through September of this year.
That figure is consistent with a previous HPI forecast released back in July.
On the buying front, home sales are expected to increase at a healthy rate. A recent Economic and Housing Market Outlook from Freddie Mac is projecting total home sales to hit 5.98 units in 2016, up from 5.74 million units this year.
Overall, that’s roughly a 4% jump.
2. Rental Housing May Stall out in Certain Markets
Rental housing has come on strong over the last few years and the result is that rental rates have skyrocketed. In 2015, rental rates appreciated by 4.5%, compared to 4.3% for home values according to Zillow.
More competitive areas like San Francisco have reached all-time highs. According to Zumper, the median price for a one-bedroom apartment in San Francisco is $3,490. Rent prices continue to be highest for multi-family units, but single-family homes are quickly catching up.
An increase in available rental inventory has so far done little to stem the tide of rising prices, but the tide may be about to turn. With the Federal Reserve’s interest rate hike in December, renters may be more inclined to lock in a deal on a mortgage to escape the ballooning cost of renting. That could initiate a cooling off period of sorts for the rental market as a whole.
In cities where the energy industry is the focal point of the economy, the rental markets may be particularly susceptible to a downturn. In Houston, for example, rental prices have surged over the past year, despite the continued drop in oil prices. With job growth projected to slow in 2016, that could put the rental market on shaky ground.
There is a silver lining, however, for tech-centric cities like San Francisco and San Jose. These markets will still see a steady demand for rental units, despite the rising cost. According to Zumper, rental prices for these two cities have increased by 9.5% and 19.6% respectively over the last year and there are no signs of a slowdown in store.
3. Commercial Real Estate Will Hold Steady
The commercial real estate sector grew at a moderate pace in 2015, and that trend should continue well into the new year. Vacancy rates are down across the retail, industrial, and office sectors with office vacancies hitting their lowest point since 2008, according to the CBRE Group. By the same token, rental prices are steadily being driven up by an increase in demand.
The commercial market should continue to make gains and transaction volume is set to increase at a steady clip. There’s a possibility that prices may top out in high-end markets, but on a positive note, that sets the stage for smaller markets to thrive.
From an investment perspective, commercial real estate investment trusts are something of a question mark. REITs went on a steady slide before rebounding somewhat during the month of October. With the December rate hike, investors could see their dividends slip again.
4. Secondary Markets Offer New Opportunities for Investors
The rise of the so-called “18-hour city” is bringing a new slew of markets into play for cost-conscious investors who are focused on maximizing returns. Places like San Antonio, Charlotte, and Nashville are quickly becoming “hot spots” for real estate investors and developers alike who want to cash in on their appeal.
5. Real Estate Crowdfunding Is Primed for Growth
Real estate crowdfunding sprang up virtually overnight following the passage of the 2012 JOBS Act and the industry has grown at a staggering rate in the brief period since its inception. By year’s end, the industry is projected to be valued at more than $2.5 billion, according to Massolution, which is a jump of more than 150% over 2014 figures.
In October, the SEC finalized rules for Title III of the JOBS Act allowing non-accredited investors to participate in crowdfunded investments. This has significant implications for real estate crowdfunding as it opens up a new asset class for millions of investors who previously lacked access to the market.
Further growth in the real estate crowdfunding sector seems inevitable as new platforms develop to meet the anticipated rise in demand triggered by Title III. It’s also possible that from a demographic standpoint, the landscape of real estate crowdfunding could begin to shift towards millennial investors as near-retirees move into more conservative investments.
The Bottom Line
Lacking a crystal ball, it’s impossible to predict exactly what lies ahead for real estate in 2016. The Fed raising rates, for instance, could have serious implications for prospective homebuyers and investors alike.
As we enter 2016, however, all signs point to an optimistic outlook for real estate.
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