Existing-home sales are expected to retain the healthy gains seen this year, while prices will stay on an uptrend in 2014, according to a forecast presentation at a residential forum during the 2013 Realtors Conference & Expo. Lawrence Yun, chief economist of the National Association of Realtors (NAR), said existing-home sales have shown a 20 percent cumulative increase over the past two years, while prices have gained 18 percent, but incomes have risen only two to four percent in the same timeframe.
“We’ve come off of record high housing affordability conditions in the past year, and are now at a five-year low, but conditions are still the fifth best in the past 40 years,” Yun said. “While the median-income family in many areas will still be well positioned to buy a home in 2014, income is barely budging given growth in consumer prices.”
Yun said the other headwinds moving forward include limited inventory conditions in many areas and mortgage lending standards that are still unnecessarily stringent. “Although home sales have recovered over the past two years, mortgage purchase applications have been flat for the past four years, even with rising sales,” he said.
With higher mortgage interest rates, he expects refinancings to collapse in 2014 to the lowest level in at least 15 years, and hopes purchase applications will begin to rise. “This is an incentive for banks to increase mortgage origination, especially considering the low default rates in recent years. But even with cheap mortgages for the past four years, all-cash buyers stayed high, accounting for over 30 percent of sales,” Yun noted.
Beyond bank motivation, Yun said Washington policies for mortgage lending have been too restrictive. He cited rising fees for Fannie Mae and Freddie Mac, higher Federal Housing Administration premiums, as well as Dodd-Frank banking regulations, which have been strangling community banks. In addition, Yun said banks are holding onto funds for potential Department of Justice lawsuits, rather than making them available to mortgage borrowers.
He said job creation, and hopefully a relaxation in stringent lending standards, will offset higher mortgage interest rates. Existing-home sales this year are forecast to rise 10 percent to nearly 5.13 million, but should hold fairly even at about 5.12 million in 2014.
Limited supplies were the biggest factor in price performance in the past year, with inventory bouncing around 13-year lows, and seriously delinquent mortgages have been trending steadily down. The national median existing-home price for all of 2013 will be up just over 11 percent, to about $197,000; then increase nearly six percent next year.
Yun expects the inventory shortages to be felt again next spring. “Housing starts are the only way to alleviate inventory shortages,” he said. “Housing starts need to rise 50 percent to meet underlying demand.”
Housing starts are forecast to hit 917,000 this year and reach 1.13 million in 2014, which is still well below the underlying demand of about 1.5 million. New-home sales are likely to total 429,000 in 2013, and grow to 508,000 next year.
Inflationary pressure may begin to build during the course of 2014, with consumer prices projected to rise 2.7 percent, but Yun said inflation could reach four to six percent in 2015. Mortgage interest rates are expected to trend upward and reach 5.4 by the end of next year.
Yun projects growth in Gross Domestic Product to be 1.7 percent this year and 2.5 percent in 2014. “If not for the housing recovery, we could be on the verge of a recession,” Yun noted. “The rent component of inflation is rising, so the only way to tame price growth is new home inventory.”
Since the economic downturn, 8.8 million jobs were lost, but only seven million have been regained. “We need another six to eight million jobs to get back to normal,” Yun said. The states with the fastest job growth are North Dakota, Utah Idaho, Texas, Colorado, Minnesota, Georgia, Washington, Arizona and New Jersey. The unemployment rate is projected to decline to about 6.7 percent around the end of next year.
Based on the forecast, the top 10 markets to watch for a housing turnaround in 2014 are Salt Lake City; Naples, Fla.; Tampa, Fla.; Atlanta; Boise, Idaho; Houston; Charlotte, N.C.; Denver; Seattle; and Tucson, Ariz.
Also speaking was John Krainer, senior economist at the Federal Reserve Bank of San Francisco, who said near-term economic momentum is weakening, but improvement in growth is expected going forward. “Inflation has been subdued, and is expected to remain below the Fed’s two percent target over the next few years,” he said. “Despite improvement in the labor market, the unemployment rate remains elevated but will be falling slowly.”
Krainer notes improved household net worth, aided by rising home values, is supporting consumption spending, but home sales and inventories are not growing as expected. “New-home sales are significantly underperforming, and have been bouncing around World War II lows,” he said.
“There is a big disconnect between rising home prices and inventory slowing down,” Krainer said. Normally, higher levels of new construction would be expected in a rising sales environment.
Krainer notes there is a relationship between the share of underwater mortgages and the number of homes for sale. “In markets where we saw a high percentage of underwater home owners, we also saw lower inventory levels.”