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.
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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.
The cool down in home price gains could help open the door to new buyers. Homeowners who’ve benefitted from higher home values may decide now’s the time to sell.
“Because of the price appreciation they have experienced, you will have more sellers put homes on the market next year,” Smoke told CNN earlier this month.
But other housing insiders aren’t so sure. Higher interest rates may push some homeowners to reinvest in their current homes rather than sell and buy new. The American Institute of Architects expects spending for home improvement projects in 2016 to eclipse this year’s record tally.
In addition, housing inventory remains in short supply in many markets, especially in more affordable price ranges. Total housing inventory in October was 4.5% lower than the year prior, according to data from the National Association of Realtors.
3. Buying vs. Renting
Buying a home remains cheaper than renting in nearly all of the major housing markets, and that’s still likely to be the case for most communities in 2016, according to Trulia housing economist Ralph McLaughlin.
At a national level, average interest rates would need to hit about 6.5% to tip the balance, according to McLaughlin. But rates would need to push into the double-digits for renting to make better financial sense in many metro areas.
At the same time, more than two-thirds of property managers surveyed by Rent.com said rental rates will likely jump by 8% next year on average.
4. Will Millennials Enter the Market?
Few topics inspire more breathless coverage in housing circles than the millennial generation. There are countless predictions about when and where they’ll start buying houses.
Smoke, the Realtor.com economist, is bullish on millennials and their impact in 2016. He expects them to account for nearly a third of all existing home purchases. But familiar obstacles like student loan debt and consistent employment may force some younger buyers to keep their homebuying plans on hold.
Trulia’s recent survey shows only 13% of 18- to 34-year-olds who plan to buy a home say they’ll do so in the next year. The figure rises above 35% if the timeframe stretches to 2018.
“What would make more millennials take the leap from renting to homeownership? More money,” McLaughlin, the Trulia economist, wrote in his 2016 forecast. “Jobs and down payments are keys to turning these renters into homeowners within the next 12 months.”
This article originally appeared on Credit.com.