Preparing for 2016: Rising Rents Should Boost Demand for Entry-Level Homes

We’ll see more demand for entry-level homes in the New Year as we continue to see steady rebound in the housing market

By Patrick S. Duffy

Although you might not hear it in presidential debates these days, the U.S. economy is set to be among the better global performers in 2016, and is one reason why the Federal Reserve Open Market Committee finally opted to start increasing its Federal Funds rate in December. Fortunately for the building industry, one key pillar of this economic strength has been the steady rebound in the housing market, especially for new home demand. As housing rents continue to outpace both inflation and increases in home prices, look for 2016 to be a great year for builders who can figure out that magic formula including price points, interest rates, location, and product.

To be sure, one issue likely to impact the housing market will be higher interest rates, but since the Fed has telegraphed that any future increases will be slow and steady—such as one-quarter of a percentage point every three months or so—both the stock and mortgage markets will have time to adapt. Moreover, since fixed-rate mortgages are tied not to the Federal Funds rate, but to the 10-year bond, most soothsayers are looking for average 30-year mortgage interest rates to end 2016 at about 4.5 percent.

At the same time, however, since access to consumer credit is slowly beginning to loosen, there remains a large cohort of potential first-time buyers with good, but not great, credit who may finally be able to jump in and make a purchase. Of course another impetus stoking first-time buyer demand is the cost of rental housing, with more than 85 percent of housing markets recently reporting rents that exceed 30 percent of rental-occupied households. Yet for those builders who also act as credit counselors in advance of a home sale, the ability to nurture and cajole first-time buyers may make a significant difference to their bottom lines. Fortunately, at least when these buyers dip their toes into the market, they won’t be competing as much with the all-cash buyers who, although providing a floor for housing prices in 2009, have ended up crowding out traditional buyers requiring both mortgage and longer escrows.

Speaking of first-time buyers (most of whom are Millennials)—after a few worrisome years plagued by student debt payments and a poor job market, this huge demographic cohort re-emerged strongly in 2015. Accounting for about one-third of total housing sales this year, they’re expected to contribute even stronger numbers in 2016. In addition, look for members of the Gen X cohort—who were hit disproportionately during the Great Recession—to finally be able to recover lost home equity and move to larger homes and better neighborhoods in order to belatedly account for growing families. In turn, they’ll release housing stock in existing, close-in suburbs that are proving increasingly popular with Millennials as they start their own families and are willing to trade urban locations for more space. Even older Baby Boomers will contribute to this trend, as they’ll be taking advantage of regained equity and today’s mortgage rates to downsize and lock in both these gains and a lower cost of living for their retirement years.

One current and future challenge for builders will be how to incorporate the green and smart home features increasingly demanded by today’s buyers, and still keep the price tag affordable. With more than half of builders and nearly 40 percent of remodelers reportedly working on projects with green home features, this is a trend expected to become even more mainstream over the next few years. For sellers on a budget, simply adding in smart thermostats and lights controllable by phones and tablets can quickly differentiate a home from the competition at a reasonably low cost. To find those buyers, sellers will also have to increasingly branch out online and via mobile device apps such as Zillow, Trulia, Realtor, and even OffMLS, which features homes about to come onto the market, but aren’t yet officially listed for sale.

Finally, given that almost every listing for both homes for sale and rent now feature high-quality photographs to ramp up their game, more sellers are starting to incorporate professionally shot videos and even virtual 3D tours, so buyers can ‘walk’ model complexes without ever leaving their homes.

In many ways, 2016 looks to be that ‘normal’ market we’ve been trying to reach for years, which is good for consumers, builders, and the overall economy.

Patrick S. Duffy
is a Principal with MetroIntelligence Real Estate Advisors. He may be reached at or at 310-666-8288.

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