How Will Housing Recovery Fare In 2014?

Investor's Business Daily

After capping the year with double-digit gains in home prices and sales, the housing market is expected to stay on the recovery path in 2014.

An economic growth spurt and brighter jobs picture will likely drive strong building demand.

Here's how real estate experts size up the outlook for the year ahead:Home prices are expected to keep rising, but at a notably slower pace. Sales should keep the healthy gains they saw in 2013 and possibly see a slight uptick. Homebuilding is forecast to take off and the foreclosure crisis should draw closer to an end. Interest rates are seen rising, but not enough to dissuade house hunters.

"For the general consumer, the market will be good in 2014," said Lawrence Yun, chief economist at the National Association of Realtors. "Home values will continue to rise, but not sharply, but there won't be a decline.

Even with no increase in home sales in 2014, he says, real estate business activity would be considered "good, since it matches the last year's home sales activity.

This year has marked the second straight one of a "very respectable recovery," says Yun, with a 20% cumulative increase in existing-home sales over the past two years and nearly a 20% rise in home prices.

Existing-home sales are likely to plateau in 2014, he says. They slid 4.3% from October to an annual rate of 4.90 million in November, and 1.2% from a year earlier, in NAR data released Thursday. It was the first time in 29 months that sales were below year-ago levels.

Home prices, which rose 11% in 2013, will grow at a slower pace of 5% in 2014, Yun estimates.

He attributes the expected slowdown in the home-price rise to "less affordable conditions from higher prices and higher mortgage rates.

Rates On A Ride

The Federal Reserve on Wednesday said it will in January start tapering economic stimulus that has helped keep interest rates low. But it included language about keeping its target range for the federal funds rate, giving hope that mortgage rates won't head far north.

Yun sees the 30-year fixed rate mortgage rate going above 5% by the second half of 2014, up from an average 4.26% in November and 4.47% this week. That will hurt affordability, Yun says.

While rising interest rates will have a negative impact on the housing market, continued job creation will have a positive influence, says Yun. He estimates 2 million or more jobs will be created in 2014.

Celia Chen, housing economist at Moody's Analytics, also expects job growth to pick up in 2014 to about 200,000 jobs a month, up from roughly 180,000 a month in 2013.

Homebuilding Takes Stage

As businesses start hiring, it will help generate greater demand for housing, driving a "significant amount" of homebuilding, she says.

Chen forecasts a homebuilding "boom" in 2014, which will create additional jobs for everyone from construction workers to manufacturers, spawning even more demand for housing.

She forecasts a "fairly robust economic rebound" from mid-2014 into 2015, and expects GDP growth to rise to about 3% next year from estimated 1.5% growth in 2013.

"The homebuilding boom in 2014 drives our strong economic forecast," Chen said. "Homebuilding generates a lot of jobs.

Excess inventory of housing on the market is low. The three-month average supply of new homes was only 4.7 months' worth as of October, the most recent data, she says.

If there aren't a lot of homes for sale as buyer demand rises, she notes, it paves the way for construction. That's a positive for builders such as PulteGroup (PHM), Lennar (LEN), D.R. Horton (DHI) and Toll Bros. (TOL)Housing starts are forecast to rise 22.8% to 1.13 million units in 2014, according to the NAR, topping a projected 17.1% rise in 2013. Chen forecasts new-home sales of 680,000 in 2014 vs. 430,000 in 2013.

Different Forces At Work

However, analysts do see inventory increases ahead for 2014 — and not just because of new building.

"Rising home values have lifted many underwater homeowners out of negative equity and some of those homeowners will choose to sell their house," said Svenja Gudell, a senior economist at housing website Zillow (Z).

Gudell says the negative-equity problem is the biggest reason that for-sale inventory has been constrained this year.

"We expect home values to continue rising, albeit at a slower, more sustainable pace, continually lifting homeowners out of negative equity going forward," she said.

However, Gudell expects reduced demand for homes in 2014. She bases her forecast on the point that housing investors are starting to decrease their new investment and are buying fewer homes.

"As home values have risen in 2013, returns for investors have shrunk considerably and fewer 'deals' are available now," she said.

Jay Brinkmann, chief economist at the Mortgage Bankers Association, expects mortgage originations to fall to about $1.2 trillion in 2014 from a level of around $1.7 trillion to $1.8 trillion in 2013.

He says mortgage originations began to fall in the summer when interest rates started to go up.

Brinkmann expects interest rates to climb through 2014, averaging about 5% and finishing the year at a little over that. As a result, he expects mortgage refinancings to keep dropping, with refinance originations sinking 57% in 2014.

"While rates will be higher than what they were, they won't be at a level that will discourage home purchases," he said.

Brinkmann forecasts purchase originations to rise 9% to $723 billion in 2014, according to a MBA October report. The rise goes along with the increase in new home sales, he says, which he expects to be up about 10% in 2014.

Foreclosure Outlook

The distressed-housing crisis will draw closer to an end as foreclosures start to "level out," said Daren Blomquist, vice president at trouble tracker RealtyTrac. He sees 2014 as "the year we transition back to normal," down to about 85,000 filings a month by the first quarter of 2015 .

"The market has worked through most of the bad loans that triggered the crisis to begin with," he said. But some remain to be "cleaned up.

The jury is still out on how new lending guidelines going into effect Jan. 10 will impact borrowers.

The qualified mortgage — or "QM" — rule by the Consumer Financial Protection Bureau requires, among other things, that creditors set specific debt-to-income standards for home lending.

The rule may tend to tighten underwriting practices, says Rick Sharga, executive vice president of real estate marketplace Auction.com.

"We have already seen them begin to get tighter as lenders get ready," he said. "I think credit availability will tighten up, at least in the first quarter of 2014."

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