Home Sales Will Likely Rise in 2015, as Consumer Sentiment Improves

Consumers are feeling better about the U.S. economy, and it could lead to an increase in home sales in 2015. Consumer confidence indicators reached milestone highs recently, and such indicators usually correspond with a rise in home sales and real estate activity in general.

The long-running consumer opinion survey conducted by the University of Michigan and Reuters reached a milestone last week. According to the survey, consumer sentiment hit its highest point in seven years, climbing from 86.4 in October to 89.4 in November. This is the latest in a string of developments that show the economy is continuing to improve, following the devastation brought on by the recession.

The seven-year statistic is noteworthy. It means that U.S. consumers haven’t felt this good about the economy since before the housing crisis and subsequent recession. Call it a return to pre-recession normalcy.

As a result of these and other trends, there is a good chance we will see home sales rise in 2015. Historically, the two trends move up and down with some degree of correlation. When the economy adds jobs, it puts more people into a position to buy a home. And when consumer confidence rises, those people are more likely to make a purchase.

In short, more people today have (A) the ability to purchase a house and (B) the willingness to do so. That’s what we are seeing in the current housing market, and it will be a driver of home sales in 2015 as well.

Freddie’s Forecast: Home Sales to Rise 5% in 2015

Freddie Mac, the government-controlled corporation that buys, securitizes and sells home loans, recently made the forecast that U.S. home sales would rise in 2015. If their forecast proves accurate, it would lead to yet another milestone — the most active real estate market in eight years.

Housing starts forecast
Housing starts forecast, Freddie Mac

According to Frank Nothaft, the company’s chief economist:

“We are expecting to see total home sales to increase by about 5 percent over that time period [from 2014 to 2015] to the best sales pace in eight years.”

Housing starts, which mark the beginning of construction for a new house, are expected to climb by a whopping 20% from 2014 to 2015 (see bar chart). At present, all of the traditional indicators point to an active year for housing in 2015.

In October, the U.S. economy gained about 214,000 new jobs, bringing the unemployment rate down to 5.8% — it’s lowest point since before the recession. Yet another milestone.

More jobs mean that more people are, or soon will be, in a position to buy a house. Historically, increases in the nation’s employment rate correspond with increased home sales, a trend we could see more of in 2015.

Higher Mortgage Rates Offset by Income and Job Growth

I wrote previously that mortgage rates are expected to rise gradually in 2015. One noted economist predicted that the interest rate for a 30-year fixed mortgage could average around 4.6% next year, and possibly top out at 5% by year’s end. You might think that would put a damper on housing activity and reduce sales. So why the bullish forecast for home sales in 2015?

According to Freddie Mac:

“While higher interest rates generally detract from housing activity, when they occur with strong job and income growth the net result can be increases in household formations, construction, and home sales. Our view for 2015 is exactly that, namely, income and job growth offset the negative effect of higher interest rates and translate into gains for the nation’s housing market.”

Purchase loan volume is expected to rise next year, resulting from increased home-buying activity. Refinancing volume, on the other hand, is expected to drop off due to rising mortgage rates.

What does it all mean for home buyers? Increased competition, for one thing. The steadily improving economy is putting more qualified buyers into the market, which means there will be stiffer competition for houses. Increased demand and limited inventory will also push home prices higher in 2015, at least in most parts of the country.

Disclaimer: This story includes forecasts for home sales in 2015. These forward-looking statements were supplied by third parties and may not reflect the views of the publisher. We make no claims or guarantees about future housing and economic conditions. Third-party data presented above are deemed reliable but not guaranteed.