What’s ahead for the housing market?

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Will your house hold its value as a financial investment and a good place for you to live during the next decade? What’s ahead for the housing market?

To answer those questions, homeowners and homebuyers should watch four trends:

  1. Echo boomers’ entry into their peak homebuying years.
  2. Baby boomers’ entry into their peak home-selling years.
  3. The new demand for smaller homes.
  4. The new demand for more energy-efficient homes.

More demand, but more supply, too

The demand for housing has diminished as unemployment and other financial pressures have forced college graduates to stay with their parents and whole families to move in with their relatives. But longer term, that demand is expected to be “extremely sound,” says Steve Melman, director of economic services at the National Association of Home Builders, or NAHB, in Washington, D.C.

Melman expects a resurgence to occur as economic conditions improve and the children of the baby boomers, called the echo boomers, enter their peak homebuying years.

Demand for housing already has returned to some extent and may increase further in 2010. The National Association of Realtors, or NAR, recently reported that pending home sales rose for nine consecutive months through October 2009. NAR Chief Economist Lawrence Yun said in a statement that existing home sales should number 5.5 million to 6 million annually based on population growth, but that sales were “well below the 5 million mark” before the federal homebuyer tax credit was offered.

Yet even an increase in demand may not be enough to match the number of sellers, warns Dowell Myers, a professor of urban planning and demography at the University of Southern California School of Policy, Planning and Development in Los Angeles.

“Before, there was an unlimited supply of buyers because of the baby-boom generation,” he says. “But now that unlimited supply of buyers is going to turn into an unlimited supply of sellers.”

Myers says sellers eventually will outnumber buyers, unless a greater effort is made to “cultivate” them.

“There is a shortage of young people all over the country relative to the number of seniors in the future, so they’ll all need to step up to meet the supply of homes for sale,” says Myers.

The implications for current homeowners could be dire if Myers’ read is correct as a supply-and-demand imbalance of such magnitude could cause home prices to decline. The solution? Myers recommends a greater investment in education so more young people will be able to afford to own a home in the future.

New homes to be compact, energy-efficient

As the population ages, again due to the baby boomers, smaller homes may be in greater demand. As Melman points out, empty-nesters need one spare bedroom for visiting grandchildren, not four bedrooms for growing teenagers. Smaller homes are also cheaper and easier to maintain and should be less costly to heat and cool.

An NAHB report, “Home of the Future,” states that the size of new single-family homes reached a 35-year record of more than 2,400 square feet in 2006. But that growth spurt isn’t expected to continue into this decade. Instead, the average size of a new home will range from about 2,300 to 2,500 square feet in 2015.

Myers says new houses will be more compact, more efficiently designed in their use of space and richer in amenities inside the home and nearby in the neighborhood. These trends are seen as another likely result of an aging population and the push toward more efficient land use.

“The new house will be an efficient house that’s easy to live in for one or two people only and may be located in more dense configuration, so people can walk to nearby amenities,” he says.

New homes also will be more energy-efficient in terms of windows, doors, insulation and even site planning due to concerns about climate change and the need to reduce energy consumption and emissions.

Homebuyers generally are willing to pay about 2 percent to 2.5 percent of the purchase price of the home for greater energy efficiency, Melman says. After that, the willingness to pay more for green-built features wanes.

That desire for energy-efficiency doesn’t necessarily mean current homeowners should invest heavily in such upgrades in 2010. Instead, Myers suggests, homeowners should study up on new technologies and be ready to adopt them when the time — and the price — seems right.

“I don’t think there is a big rush because the technology keeps evolving,” he says.

Buyers also might start to think more about utility and transportation costs when they purchase a home, Melman suggests.

“If you look at prices and interest rates, affordability has never been better for a long time. But people are also looking at the operating costs and energy efficiency of a home. You want to make sure you can afford the mortgage payment, but you also don’t want to have $1,000-a-month utility bills,” he says.