Realtor.com 2015 forecast: More first-time buyers

SAN JOSE, Calif. – Dec. 8, 2014 – First-time buyers will return to the market next year, according to realtor.com's 2015 Housing Forecast.

The first-timers rebound is among several key developments projected for the coming year by realtor.com, the website of the National Association of Realtors® (NAR) operated by News Corp's subsidiary Move Inc.

"The residual financial effects of recession-driven job losses and subsequent unemployment have impeded millennials' entry into the home-owning market," says Jonathan Smoke, chief economist for realtor.com. "In 2015, increases in employment opportunities will empower younger buyers to return to the market and fuel the continued housing recovery. If access to credit improves, we could see substantially larger numbers of young buyers in the market."

Smoke offers one caveat, however: "Given a high dependency on financial qualifications, (first-time homebuyers) activity will be skewed to geographic areas with higher affordability, such as the Midwest and South."

Realtor.com's top 5 housing predictions for 2015

1. Millennials will drive household formations: Both population and households have grown at a slightly higher pace in 2014, and this trend will continue in 2015 with modest improvement over this year's increases. Households headed by millennials will see significant growth as a reflection of economic gains. Millennials will also drive two-thirds of household formations over the next five years. Next year's addition of 2.75 million jobs and increased household formation will be the two key factors driving first-time buyer sales.

2. Existing home sales will increase +8%: Existing home sales will grow as more buyers enter the market motivated by a clear belief that both rates and prices will continue to rise. The increase in home sales year-over-year will be similar to 2012, but this time the composition of properties sold will be more normal with minimal levels of distressed properties. While the majority of housing activity next year will be driven by baby boomers preparing for retirement, millennials will account for 65 percent of first-time homebuyer sales in 2015.

3. Home prices will gain +4-5%: Low inventory levels and demand driven by improved employment opportunities will push home prices up next year. While first-time homebuyers have many economic factors working in their favor, increasing home prices will make it more difficult to get into high priced markets such as San Francisco and San Jose, Calif. As a result, first-time homebuyer activity is expected to concentrate in markets with strong employment and affordability, such as Des Moines, Iowa; Atlanta and Houston.

4. Mortgage rates will end the year at 5%: Mortgage rates will increase in the middle of 2015, as the Federal Reserve increases its target rate by at least 50 basis points before the end of the year. Thirty year fixed rate mortgages will reach 5 percent by the end of 2015. One year adjustable rate mortgages (ARMs) will rise minimally. Lower ARM interest rates will influence an uptick in buyer interest for adjustable and hybrid mortgages. While still at historic lows, rate increases will affect housing affordability for first-timers trying to break into the housing market and be another factor pushing them to less expensive locales.

5. Home affordability will decrease 5-10%: Affordability will decline in 2015 by 5-10 percent, based on home price appreciation and increasing mortgage interest rates. This decline will be somewhat offset by increasing incomes. When considering historical norms, housing affordability will continue to remain strong next year.

Realtor.com's outlook for gross domestic product (GDP) and home sales and prices is more optimistic than NAR's forecast, which projects existing-home sales to rise 5 to 7 percent and home prices to increase 3 to 4 percent, based on GDP growth of 2.5 to 2.8 percent.