The housing market continued its uneven recovery in 2013 and will enter 2014 closer to normal than it was a year earlier. Consumer optimism is climbing back: In Trulia’s latest survey, 74 percent of Americans said that homeownership was part of achieving their personal American Dream — the highest level since January 2010. Even among young adults (18- to 34-year-olds), many of whom struggled through the recession and are still living with their parents, 73 percent said home ownership was part of achieving their personal American Dream, up from 65 percent in August 2011.
Rising prices in the past two years have been great news for homeowners, especially for those who had been underwater, and the real estate industry has benefited from higher prices and more sales volume.
At the same time, the effects of the recession and housing bust still sting: the barriers to homeownership remain high, and a few markets — mostly in Florida — still have a foreclosure overhang. Plus, the housing recovery itself brings its own challenges, including declining affordability and localized bubble worries, especially in Southern California.
Barring any economic crises, the housing market should continue to normalize. Here are five ways that the 2014 housing market will be different from 2013.
1. Housing affordability worsens
Buying a home will be more expensive in 2014 than in 2013. Although home-price increases should slow from this year’s unsustainably fast pace, prices will still rise faster than both incomes and rents. Also, mortgage rates will be higher in 2014 than in 2013, thanks to the strengthening economy and to Fed tapering. The rising cost of homeownership will add insult to injury in America’s least affordable markets; in October 2013, for instance, 25 percent or less of the homes listed for sale in San Francisco; Orange County, Calif.; Los Angeles; and New York were affordable to middle-class households. Nonetheless, buying will remain cheaper than renting. As of September, buying was 35 percent cheaper than renting nationally, and buying beat renting in all of the 100 largest metros. However, prices and mortgage rates might rise enough to tip the math in favor of renting in a couple of housing markets — starting with San Jose, Calif.
2.The homebuying process gets less frenzied
Homebuyers in 2014 might kick themselves for not buying in 2013 or 2012, when mortgage rates and prices were lower, but they’ll take some comfort in the fact that the process won’t be as frenzied. There will be more inventory on the market in 2014, partly because of new construction, but primarily because higher prices will encourage more homeowners to sell — including those who are no longer underwater.
Also, buyers looking for a home for themselves will face less competition from investors who are scaling back their home purchases. Finally, mortgages should be easier to get because higher rates have slashed refinancing activity and pushed some banks to ramp up their purchase lending. Moreover, the new mortgage rules taking effect in 2014 will give banks better clarity about the legal and financial risks they face with different types of mortgages, hopefully making them more willing to lend. All in all, more inventory, less competition from investors and more mortgage credit should all make the buying process less frenzied than in 2013 — for those who can afford to buy.
3. Repeat buyers take center stage
This past year was the year of the investor, but 2014 will be the year of the repeat homebuyer. Investors buy less as prices rise: Higher prices mean that the return on investment falls, and there’s less room for future price appreciation. Who will fill the gap? Not first-time buyers: Saving for a down payment and having a stable job remain significant burdens, and declining affordability is also a big hurdle for first-timers. Who’s left? Repeat buyers. They’re less discouraged by rising prices than either investors or first-time buyers because the home they already own has also risen in value. Also, the down payment is less of a challenge for repeat buyers if they have equity in their current home.
4. How much prices slow matters less than why and where
Prices won’t rise as much in 2014 as in 2013. The latest Trulia Price Monitor Report showed that asking home prices rose year-over-year 12.1 percent nationally and more than 20 percent in 10 of the 100 largest metros. But it also revealed that these price gains are already slowing sharply in the hottest metros.
How much prices slow matters less than why. If prices are slowing for the right reasons, great. Growing inventory, fading investor activity and rising mortgage rates are all natural price-slowing changes to expect at this stage of the recovery. But prices could slow for unhealthy reasons, too. If we have another government shutdown or more debt-ceiling brinksmanship, a drop in consumer confidence could hurt housing demand and home prices.
Where prices change matters, too. Slowing prices are welcome news in overvalued or unaffordable markets, but markets where prices are significantly undervalued and borrowers are still underwater would be better off with a year or two of unsustainably fast price gains.
5. Rental action swings back toward urban apartments
Throughout the recession and recovery, investors bought homes and rented them out, sometimes to people who lost another home to foreclosure. In fact, the number of rented single-family homes leapt by 32 percent during that period. Going into 2014, though, investors are buying fewer single-family homes; loosening credit standards might allow more single-family renters to become owners again; and fewer owners are losing homes to foreclosures to begin with — all of which mean that the single-family rental market should cool. At the same time, multifamily accounts for an unusually high share of new construction, which means more urban apartment rentals should come onto the market in 2014. Urban apartments will be the first stop for many of the young adults who find jobs and move out of their parents’ homes. In short, 2014 should mean more supply and demand for urban apartment rentals, but slowing supply and demand for single-family rentals.
Ironically, economic recovery means that the overall homeownership rate will probably decline, as some young adults form their own households as renters. Still, the shift in rental activity from suburban single-family to urban apartments would be yet another sign of housing recovery.
What other reasons will cause 2014 to be different? New local markets will take the spotlight. Trulia’s top 10 markets to watch are entering 2014 with strong fundamentals, including recent job growth and longer-term economic success, as well as recent construction activity typical of vibrant markets.
Top 10 markets to watch in 2014:
- Bethesda-Rockville-Frederick, Md.
- Charlotte, N.C.-S.C.
- Fort Worth, Texas
- Nashville, Tenn.
- Oklahoma City
- Raleigh, N.C.
- Salt Lake City
- Tulsa, Okla.
Why are so many of the high-profile markets of 2013 missing from the list? Trulia ruled out markets that were more than a little overvalued according to its latest Bubble Watch Report, which eliminated most metros in Texas and coastal California. The real estate resource also struck markets with a large foreclosure inventory most of Florida. Our 10 markets to watch, therefore, should have strong activity in 2014 with few headwinds.
Source: MSN Real Estate