Trulia recently published an article taking a look at real estate predictions for 2014. Trulia states that Nnext year looks to be the year of the repeat home buyer, as worsening affordability discourages first timers and investors; also, the buying process will be less frenzied. Hot markets to watch are primarily in the South, Plains, and Mountain states. Rental activity will swing back toward urban apartments, away from single-family homes.
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% of Americans said that homeownership was part of achieving their personal American Dream – the highest level since January 2010. Even among young adults (18-34 year olds), many of whom struggled through the recession and are still living with their parents, 73% said homeownership was part of achieving their personal American Dream, up from 65% in August 2011. Rising prices over 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 both 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 5 ways that the 2014 housing market will be different from 2013:
- 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 (see #4, below), prices will still rise faster than both incomes and rents. Also, mortgage rates will be higher in 2014 than in 2013, thanks both to the strengthening economy (rates tend to rise in recoveries) and to Fed tapering, whenever it comes. The rising cost of homeownership will add insult to injury in America’s least affordable markets: in October 2013, for instance, 25% or less of the homes listed for sale in San Francisco, Orange County, Los Angeles, and New York were affordable to middle class households. Nonetheless, buying will remain cheaper than renting. As of September 2013, buying was 35% cheaper than rentingnationally, 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.
- The Home-Buying Process Gets Less Frenzied. Home buyers 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 next year, partly due to 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 (see #3, below). 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 coming into 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.
- Repeat Buyers Take Center Stage. 2013 was the year of the investor, but 2014 will be the year of the repeat home buyer. 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
Biggest Obstacle to Homeownership
18-34 year-olds only
Saving enough for a down payment
Not having a stable job
Having a poor credit history
Qualifying for a mortgage
Unable to pay off existing debt
Rising home prices
Rising mortgage rates
Among renters who wish to buy a home right now. Respondents could choose multiple options. Survey conducted November 2013.
- 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 showed us that asking home prices rose year-over-year 12.1% nationally and more than 20% 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.
- 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 (or the same!) home to foreclosure. In fact, the number of rented single-family homes leapt by 32% during this 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 be different? New local markets will take the spotlight. Our 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. They are, in alphabetical order:
- Bethesda-Rockville-Frederick, MD
- Charlotte, NC-SC
- Denver, CO
- Fort Worth, TX
- Nashville, TN
- Oklahoma City, OK
- Raleigh, NC
- Salt Lake City, UT
- Seattle, WA
- Tulsa, OK
Why are so many of the high-profile markets of 2013 missing from our list? We ruled out markets that were more than a little overvalued according to our latestBubble Watch, which eliminated most metros in Texas and coastal California. We also struck markets with a large foreclosure inventory (thanks for the data, RealtyTrac), like most of Florida. Our 10 markets to watch, therefore, should have strong activity in 2014 with few headwinds.