Why Real Estate Could Soar in 2015

By Markets Fool.com

Following double-digit gains in 2012 and 2013, U.S. home prices grew at a much slower pace in 2014, with the average home increasing in value by less than 3%.

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Case-Shiller Home Price Index: Composite 20 Chart

So what's in store for 2015? While it's impossible to know for sure what the future will hold, there are a few good reasons to believe 2015 could be an excellent year for real estate.

It's getting expensive to be a renter
According to a report from Zillow, U.S. renters paid almost 5% more rent in 2014 than in 2013. Some areas of the country saw much sharper rent increases. For example, San Francisco saw its average rent rise by 14% in the past year. And because home prices rose by less than 3% in 2014, it's fair to say that rent is getting expensive faster than home ownership is.

As rent increases, it simply makes more sense to buy a home. With home prices stabilizing in 2014 and rent continuing to rise at twice the rate of income growth, we could see a lot of people decide that homeownership is the better choice.

Fannie and Freddie are creating more buyers
One big problem with the U.S. housing market is the lack of affordable mortgages for people who can't make 20% down payments. FHA loans have gotten very expensive over the past few years -- to the point where it makes more sense to rent in many cases.

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For 2015, this is changing. Fannie Mae and Freddie Mac are both introducing mortgage programs that require as little as 3% down, which will open up homeownership to millions of people with good credit and good jobs who simply don't have large amounts of cash to put down on a home. Sure, there will still be mortgage insurance, but it's likely to be much cheaper than the FHA version.

This could be a real boost, especially to first-timers, who generally don't have a lot of cash. According to the National Association of Realtors, first-time buyers made up the smallest share of the housing market in 27 years. And, the Federal Reserve found that 45% of renters delayed buying a home simply because they couldn't afford a down payment.

So, the combination of high rent and easier mortgages might be just the incentive many renters need to finally jump into homeownership.

Mortgages are still cheap -- but for how long?
This could be the biggest "wild card" in the housing market over the next year. The average 30-year mortgage rate in the U.S. is currently just under 4%, which is still extremely low on a historical basis.

US 30 Year Mortgage Rate Chart

However, a lot of experts are predicting that 2015 will be the year when rates finally begin to rise. With continued improvement in the U.S. economy, it's only a matter of time before the Federal Reserve pulls the trigger on a rate hike, and this will create upward pressure on the mortgage market.

If rates spike to say, 5%, it could definitely cause a slowdown in the real estate market. However, it's fair to say that more people are expecting rate hikes this year than last year, so it will be interesting to see if buyers try to take advantage of low rates when this year's "selling season" begins.

Will 2015 be a great year for real estate?
With lots of renters currently sitting on the sidelines, and the new easier-to-afford mortgage programs, there is definitely the potential for an influx of new homebuyers in 2015. If mortgage rates cooperate by staying low, we could easily see a very strong real estate market in 2015. We'll just have to wait and see.

The article Why Real Estate Could Soar in 2015 originally appeared on Fool.com.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Zillow. The Motley Fool owns shares of Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.