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Thursday, January 9, 2014

Keys for the Housing Market in 2014


2013 was characterized by a contrast between the first and second half of the year.  The first half had the benefit of record low interest rates that helped to push up prices as buyers attempted to out-bid each other for homes.  Los Angeles saw an increase in median price of nearly 30%, and Phoenix had an increase in excess of 50%.  With higher prices in place, the second half of the year also saw higher interest rates which tempered the strong demand.  So what should we expect in 2014?

There are reasons to believe that 2014 will be a strong year for housing.  But there are also some concerns about where the market might go.  As the old saying goes, “Hope for the best, but be prepared for the worst.”

Why 2014 will be a good year for housing.

·         Housing formations are expected to pick up which will boost demand for new homes.  This will lead to an increase in construction as inventory levels have been low. 

·         The overall economic picture should continue to improve.  Jobs are the driving force behind housing, and as wages increase there will be more consumers in a position to buy their first home or move-up.  Also, delinquencies continue to fall which indicates consumers are in a better financial position than they have been in recent years.

·         Although rates are rising, they are still very low by historical standards which will aid affordability.

Now here’s the other side of the coin.  What could derail the market in 2014?

·         Speaking of interest rates…  If rates continue to rise as expected it will impact affordability and reduce demand.  Most buyers still need a mortgage to purchase a home, and affordability to them is mostly based on how much that monthly mortgage payment is.

·         Some argue that the recovery we experienced in the past year was a mirage.  The Federal Reserve’s stimulus (QE 1, 2, & 3) was the main driving force in making payments so affordable (with low rates) that prices had to rise.  Therefore when rates go up, those prices will have to go back down.

In either perspective, inventories will play a critical role.  There are far fewer foreclosures coming onto the market which has contributed to the lack of inventory.  Increases in new construction need to happen to meet the demand, and as prices rise builders have greater incentive to build homes.

The mortgage industry also plays a role.  Credit is still perceived to be tight, although the industry has made a lot of progress developing programs that don’t fit in the conforming box, such as Homeowners Financial Group's Clean Slate product for buyers that have a foreclosure or short sale on their record.

If you’re looking for a prediction, you won’t find one here.  No one can say with certainty what 2014 will bring, but everyone should be aware of the key issues that will determine what the year brings for housing.

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