Is a Housing Slowdown Imminent?
2013 Was a Good Year for Housing
After the Great Recession and many years of lackluster growth, 2013 was a strong year for housing. It saw housing prices climb the most in years, the most since 2006, in fact. Prices were up 13.4 percent in the 20 largest metro markets and rose 11.4 percent overall. Limited supply of homes on the market were part of the driver toward higher prices. This rise in prices helped many with underwater loans to surface. With many factors looking up, builders even showed optimism not seen since 2005, according to surveys by the National Association of Homebuilders (NAHB).
2013’s growth was strongly driven by investors buying many homes, particularly large institutional buyers making cash purchases. They took advantage of short sales in depressed markets to buy up houses to turn into single family rentals. Blackstone Group was the leader of this trend , spending $7.5 billion on some 40,000 homes.
2014 Prime for a Housing Slowdown
As the new year begins, many are predicting a 2014 housing slowdown. Institutional investment in rental properties has fallen significantly in both January and February. January’s institutional investor purchases were at the lowest level since March 2012, a 22 month low.
Price gains are also expected to slow greatly this year. Clear Capital expects to see price gains of only 2.1 percent for the entirety of 2014. There will, however, be bright spots in certain markets. Some, like Seattle and Birmingham AL, are expected to continue seeing double digit growth. Other markets may fall, but not by much. Cities like St. Louis, Chicago, Baltimore, Atlanta, Philadelphia and others are likely to experience price drop of up to 1.7 percent.
Inventory is also expected to grow, moderating price gains. New construction will pick up and more people are expected to put houses on the market. Mortgage interest rates will continue their slow drift upward, with rates predicted to hit 5 percent by the end of the year. This is well within historical norms, but are higher than last year’s rates in the 3 – 4 percent range.
Affordability is also slumping making it harder for consumers, especially first-timers entering the market, to buy. Increases in prices and rising interest rates coupled with wage stagnation are hurting American’s ability to purchase homes. These factors are causing the homeownership rate to fall below 65 percent for the first time since 1995.
Other factors will contribute to the drag on the overall market, including the continued slowing of foreclosure activity. This removes the very lowest priced homes from the market. Stricter underwriting rules like the Qualified Mortgage regulations that came into effect in early 2014 make loan qualification harder and more expensive as well.
Seeing a slowdown in 2014 won’t be all bad, as the exit of large institutional investor will ease the home buying process for owner-occupants, who will see less a frenzied buying process.