Expectations are mixed for the housing market in 2016. More Americans are viewing homeownership as part of their personal American Dream than in recent years, and some industry observers believe those elusive millennials will finally start to make an impact next year.
Spurred mostly by new construction, total home sales could top 6 million for the first time in a decade, Jonathan Smoke, chief economist for Realtor.com, predicted recently. But next year may ultimately be more about recalibrating a new normal than rocketing past a pre-downturn benchmark.
Existing home sales are expected to grow moderately, as would-be buyers grapple with rising interest rates and slumping wages. Consumer confidence in income growth remains rocky, while about one in five Americans believe it'll be tougher to land a home loan next year compared to this one, according to a Trulia survey from November.
Here's a look at four key trends that could shape homebuying in 2016 and beyond.
1. Rising Interest Rates
After a sustained stretch of record-low interest rates, buyers will see borrowing costs rise next year. The Federal Reserve raised a key interest rate in mid-December for the first time in a decade, with as many as four "gradual increases" expected for 2016.
To be sure, they're not likely to skyrocket anytime soon. But even gradual increases can eat into your purchasing power.
Through November of this year, the average rate on a 30-year fixed mortgage was about 3.84%, according to data from Freddie Mac. The Mortgage Bankers Association projects average rates to be 4.8% by the end of 2016.
To put that in perspective, let's say you're comfortable spending no more than $1,200 a month for a principal and interest payment. With rates at 3.8%, your buying power taps out around $258,000. Bump the rate to 4.8% and your purchase ceiling falls to about $230,000.
First-time buyers and others with finances more toward the margins may struggle to get off the sidelines in a rising rate environment.
A way to curb the impact of interest rates on home affordability is to ensure you have a great credit score. The best rates go to homebuyers with great credit, so improving yours can make a major impact. You can check your credit scores for free every month on Credit.com to see where you stand.
2. Cooling Prices & Inventory
Rising home prices have been great for many homeowners in recent years, less so for those hoping to crack the market. The CoreLogic Home Price Index has increased 6% over the past 12 months. Most estimates for 2016 put price growth in the 3.5% to 5% range.