By all accounts, the 2013 real estate market returned with a bang. In some areas prices increased by upwards of 14-22%. In addition, the number of new building permits increased, lending activity turned from the refinance market to the sales market, and inventory levels neared record lows. But what does 2014 have in store for the market? Here is a look of what the experts are predicting:
1. Inventory Should Gradually Stabilize and Return to Traditional Seasonal Levels
2013 could be characterized as the “year of low inventory” as buyer demand ramped up and homeowners waited for further price increases before putting their homes on the market. The year began with a significant shortage of inventory (as reported by realtor.com), and closed with inventory levels approximately the same as a year ago. Inventory levels should stabilize in 2014, returning to typical inventory levels.
2. More Homeowners Are Likely to Return to Positive Equity
The rise in home prices helped nearly 2.5 million homeowners regain positive equity status during the second quarter of 2013. While this is good news for many, there are approximately 7.1 million homes still in negative equity and an estimated 10 million homeowners (about 21.1 percent of all homeowners) with a mortgage, remained “under-equities,” with less than 20 percent of equity in the home. The good news is that prices are expected to continue rising in 2014, which will lift more homeowners into positive territory.
3. Mortgage Rates Are Expected to Rise
Mortgage rates increased approximately 100 basis points in 2013 and are likely to rise higher in 2014. Currently the 30 year fixed rate mortgage is hovering around 4.55%. The new chairman-designate of the Federal Reserve, Janet Yellen, is expected to continue the policies of former Chairman Ben Bernanke, including keeping mortgage rates low by buying blocks of mortgage-backed securities. However, recent activity this year suggests the tapering off of the Feds purchase of these securities, which will lead to higher rates. The general consensus is that rates should stabilize around the 4.5-5% range for the 30 year fixed mortgage with the 15 year rate in the 3.5 to 3.75 range.
4. Foreclosure Activity Is Expected to Slow
Foreclosure sales are likely to play a much smaller role in the housing market in 2014. For the past 38 months the mortgage industry experienced a year-over-year decrease in foreclosure activity. Foreclosure inventory has dropped nearly 33 percent since the end of 2012. Foreclosure starts were down 39 percent in the third quarter of 2013 to the lowest level since the second quarter of 2006.
5. Further Declines in Home Affordability Are Expected
The National Association of REALTORS®’ Home Affordability Index, which compares home prices with income, dropped to a five-year low in 2013 as price increases outpaced income growth. If the U.S. economy begins to grow at a faster pace and incomes begin to rise, though, the affordability index will slide further from rising mortgage rates.
While no one can predict with certainty how the real estate market will perform, it is important to look at market indicators when investing in real estate. The indicators reflected in this article are broad-based national indicators. Local markets can and do vary. If you are contemplating adding real estate to your portfolio, we welcome the opportunity to assist you in this investment