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41 » VISIT US ONLINE @ DSNEWS.COM 5.3 million homes sold last year, and that was a 6.5 jump from 2014. So we are optimistic that existing-home sales will continue to in- crease in 2016. ere was a little bit of somber news from today's numbers, and that is that December's inventory was down quite a bit from the same month in the previous year. So we think homebuyers going into 2016 will see continued tight inventory, at least coming into the spring buying season. But the fact that prices are up year-over-year would hope- fully lead to more households putting their home on the market, because more homes will be out from being underwater—which is still plaguing some cities. What are the biggest challenges facing the housing market in the year ahead? We talked about inventory, and that's on the supply side. We think there are going to be some demand-side challenges going into 2016. e demand-side challenges are two- fold. e first is that homebuyers, especially first-time homebuyers, are having a difficult time saving up for a downpayment. We conducted a survey at Trulia last year asking homebuyers what their biggest obstacle was to buying a home, and more of them said downpayment than any other answer. Going into 2016, what we're hoping to see is that wage growth will continue—we saw some glimmers of hope of wage increases in 2015— and that will help buyers save up for that all-important downpayment. Related to that, which also affects the ability to save for a downpayment, is rent growth. We've seen rents charge ahead very strongly in many markets in 2014 and 2015. at's a double whammy for homebuyers, especially those who are renting. Rising rents actually make it a better deal to buy—rela- tively speaking, it makes homeownership look more attractive—but at the same time, increasing rents make it more difficult to save for a downpayment. On the demand side, that's one of the biggest challenges that we're going to see heading into 2016. e third thing that we're going to keep a close eye on is affordability. We've seen prices charge ahead just as strongly as rent growth in the last couple of years. In many markets, especially for first-time homebuyers, affordability is a challenge. In many markets, especially on the costly costs—metros in California and in the Northeast—homebuy- ers would have to spend 30, 40, or even 50 percent of their income to buy the median- priced home. ose three aspects—inventory, saving up for a downpayment, and affordability, are going to be the three big challenges coming into the years ahead. How will future rate increases by the Fed affect those three challenges, or will they affect housing at all? On the demand side, we don't think that the Fed increasing the interest rates will have much of an effect on homebuying. And that's because mortgage rates tend to move some- what independently from the Fed rate, which primarily impacts short-term credit. Even though the Fed raised rates in December, mortgage rates are down. Going ahead, even if mortgage rates were to rise—if the Fed were to be very aggressive with increasing interest rates—we also don't think that will have much of an effect on demand, because in many markets, mortgage rates would have to be 7, 8, 9, even 10 percent for the cost of owning to roughly equate to the cost of renting. So the financial advantage for homeownership will still persist even if mortgage rates rise. So on the demand side, there won't be much of an effect if the Fed decides to act aggressively. On the supply side, however, we do think that if the Fed were to rapidly increase interest rates, we might see a temper on new housing starts. at's primarily because the Fed rate impacts short-term credit, and many homebuilders use short-term credit construction loans to finance homebuilding. So if the Fed were to quickly increase inter- est rates, that may start to have an effect on homebuilding because it increases the cost of construction. All that said, the Fed is going to have an increasingly difficult time when making the decision about whether to raise rates. at's primarily because even though we're near full employment, or close to it, inflation is well below target. e large drop in oil prices in the last month, or really in the last year, has led to very low inflation. In fact, we may enter into a period of slight deflation in the year ahead. So the Fed is certainly going to have its challenges in trying to make the decision about whether to raise rates. "Those three aspects— inventory, saving up for a downpayment, and affordability, are going to be the three big challenges coming into the years ahead."

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