A Fresh Batch of Housing Market Forecasts and Predictions for 2016

Real estate agent shirts

The U.S. housing market had a strong year in 2015, and next year could bring more of the same. But we probably won’t see as many double-digit home price gains in 2015, like we did this year. Supply and demand imbalances could continue to drive prices north, while job gains could bring more buyers into the market. These are a few of the housing market forecasts and predictions we are hearing for 2016.

5 Housing Market Predictions for 2016

It’s that time of year again, when the Home Buying Institute rounds up a collection of insightful — and sometimes controversial — predictions for the U.S. residential real estate market. We begin with home prices and we end with Millennials, with a sprinkling of mortgage rates and employment trends in between.

Here are five key predictions for the U.S. housing market in 2016:

1. Home prices will rise more slowly in most U.S. cities.

Over the last couple of years have, we’ve seen home prices rise rapidly in many parts of the country. This was often the result of a supply and demand imbalance. In many large metro areas, there were plenty of home buyers in the market but not enough homes to meet demand. Prices tend to rise rapidly under such circumstances.

Many housing market forecasts for 2016 agree that prices will probably rise more slowly than they did in 2015, as more homes come onto the market.

In July, the financial data company CoreLogic issued a forecast for the U.S. real estate market. At that time, the company was predicting a 4.7% rise in national home prices through July 2016.

According to the report, “the CoreLogic HPI Forecasts indicates that home prices [in the U.S.], including distressed sales, are projected to … increase by 4.7% from July 2015 to July 2016.” For more on their real estate market predictions for 2016, visit www.CoreLogic.com.

The general consensus among housing analysts is that home prices in the U.S. will continue rising in 2016, at least in most U.S. cities. But the gains might not be as steep as what we have seen this year.

2. The biggest home-price gains will continue to be in the West.

In 2015, some of the biggest home-price gains occurred in the western half of the nation. Cities like Denver, Colorado and many in California experienced double-digit gains in property values. Denver and San Francisco, for example, both posted year-over-year gains above 10%.

These markets could experience some cooling in 2016, as mentioned above. But many housing analysts expect that the biggest home-price gains will continue to occur in these western markets.

In September 2015, the S&P/Case Shiller Home Price Index revealed continued appreciation across the country. But the biggest gains were reported in the west. According to David M. Blitzer, Chairman of the Index Committee:

“[The index] has risen at a 4% or higher annual rate since September 2012, well ahead of inflation. Most of the strength is focused on states west of the Mississippi. The three cities with the largest cumulative price increases since January 2000 are all in California: Los Angeles (138%), San Francisco (116%) and San Diego (115%).”

3. Mortgage rates will rise later this year and into 2016.

This week (ending October 2), the average rate for a 30-year fixed mortgage sank to 3.85%. The 30-year average has been hovering at or below 4% for most of this year. But what’s the forecast for 2016? According to some analysts, borrowing costs could begin to rise later this year and into 2016.

At the end of September 2015, Freddie Mac (the government-regulated buyer of mortgage loans) issued a housing market prediction for 2016. In it, the company’s chief economist forecast that the average rate for a 30-year fixed home loan would gradually rise to 4.2% by the end of this year, and 5.1% by the end of 2016.

This is slightly lower than their previous housing forecast, as they noted in their report:

“Based on the Fed’s decision last week to defer an increase in the Federal funds rate, we lowered our 2015 and 2016 interest rate forecasts by 0.1 percent for both the 10-year constant maturity Treasury (CMT) and the 30-year fixed rate mortgage (FRM).”

If rates do start to rise gradually this year, we could see a slight reduction in home-buying activity next year. But this could be offset by continued improvements in the job market and broader economy. And that brings us to real estate market prediction #4…

4. Job gains will bring more home buyers into the market.

In 2014, the U.S. gained about three million jobs. This year, we are on track to add another two million, according to Doug Duncan, chief economist at Freddie Mac. During September alone, the country gained another 200,000 jobs, according to the payroll company ADP.

This means there are more people in a position to buy a home. So we could start 2016 with a lot of housing demand.

On top of that, many cities across the country are still suffering from a shortage of homes for sale (relative to demand). This supply-and-demand imbalance could continue to push home prices north in 2016, as buyers compete for limited inventory.

5. Student loan debt will keep many Millennials out of the market.

According to a recent analysis by the Federal Reserve, outstanding student loan debt now totals more than $1 trillion. That’s a one followed by 12 zeros. That’s a lot of debt. And it’s keeping many would-be home buyers from entering the market. We expect this trend to continue into 2016.

Student loan debt can create additional hurdles for mortgage shoppers, and in a couple of ways. For one thing, it increases the borrower’s total debt-to-income ratio, which can cause problems during the underwriting and approval process. Additionally, excessive debt can lower a person’s credit score, especially when he or she has missed a few payments in the past. All of this makes it harder for debt-burdened Millennials to qualify for home loans.

Read: How student loan debt can derail your mortgage

The chart below shows the rise in student loan debt from 2004 to 2014, along with a steady decline in homeownership for Americans under 35.

student loan debt and homeownership
Student loan debt and homeownership rate under 35. Source: Freddie Mac

Are these two trends related, or is this just a coincidence? I’d bet on there being a connection, and I’m not alone on this. Here’s a quote from the Freddie Mac economic and housing forecast for 2016:

“During the Great Recession, many high school graduates who might not otherwise have gone to college decided to invest in a college education in hopes of enjoying higher wages once the recession ended. Similarly, some college graduates … went back for a graduate degree … These decisions generated explosive growth in student debt during the Great Recession. The overhang of this debt may be making it harder for Millennials to accumulate down payments and to qualify for a mortgage.”

Is student loan debt going to be the next big financial crisis for the U.S.? The jury’s still out on that. But it will almost certainly affect the housing market in 2016 and beyond.

Disclaimer: This story offers a collection of real estate market predictions and forecasts for 2016, most of which were provided by third parties not affiliated with this site. Such forward-looking statements should not be viewed as facts or financial advice. They are the equivalent of an educated guess. We make no claims, assertions or guarantees regarding the U.S. housing market in 2016.