Recently, HousingWire asked David Berson, chief economist at Nationwide, for his opinion on the near-term future of housing. Below are what Mr. Berson believes to be the three things you need to know about housing in 2014. We have included a quote from the article and a small comment from Keeping Current Matters (KCM) for all three points.
Number 1: 2014 should prove to be the strongest year for housing activity since before the Great Recession
“Most economists expect an improved job market in 2014, with employment growth accelerating and the unemployment rate continuing to decline. That jobless rate drop will reflect more of a pickup in employment than further declines in the labor force participation rate. This will be the key factor improving housing demand this year, even if mortgage rates rise and affordability declines. While the housing market tends to do especially well when the job market improves and mortgage rates decline simultaneously, that combination of events occurs only rarely…People buy homes when their job and income prospects improve – even if it’s more expensive to do so – rather than buy when it is inexpensive to do so but they’re worried about keeping their jobs.”
We agree that the job market will continue to improve and that rising interest rates will not be a detriment to the market in 2014. As Doug Duncan, SVP and chief economist at Fannie Mae, recently revealed:
“Consumers have taken the interest rate rise in stride. Expectations for continued improvement in housing persist, and sentiment toward the current buying and selling environment is back on track.”
Number 2: Demographics should start to favor housing activity
“If the economy expands at a faster pace this year, bringing a more rapid rate of job creation, that should translate into more households, raising housing demand. We won’t see all three million missing households return to the housing market at once. (That wouldn’t be a good thing for the housing market anyway, since that would be on top of the 1.2 million households that normally would develop this year; such a surge would swamp the existing housing supply). Beginning in 2014, the pace of household formations should accelerate to an above-trend pace for several years, pushing up housing demand.”
The Urban Land Institute recently released a report, Emerging Trends in Real Estate 2014, projecting that 4.48 million new households will be formed over the next three years. Millennials will make up a large portion of these new households. With the economy improving, we believe they will finally be moving out of their parents’ homes and, after they compare renting versus buying, many will choose homeownership.
Number 3: Mortgage availability shouldn’t worsen and may improve
“The rise in mortgage rates already has reduced mortgage origination volumes as refinance activity declines. If mortgage rates rise further this year, as expected, then refinance activity will fall still more. In response, mortgage lenders probably will ease lending standards to the extent possible under the QM rules to boost lending activity by increasing purchase originations. As a result, the increase in new households expected to be created this year, spurred by a stronger job market, should find that qualifying for a mortgage loan will be somewhat easier in 2014 than in prior years.”
We also believe that, as the refinancing market begins to dry up, mortgage entities will be more aggressive in the purchase money market (mortgages necessary to purchase a home). There even seems to be recent evidence that lending standards are actually loosening.
"One thing seems certain: we aren't likely to see average 30-year fixed mortgage rates return to the historic lows experienced in 2012."
- Freddie Mac, March 24, 2014
There are those that hope that 30-year mortgage interest rates will head back under 4%. Obviously, for any prospective home purchaser that would be great news. However, there is probably a greater chance that interest rates will return to the greater than 6% rate of the last decade before they would return to the less than 3.5% rate of 2012.
Freddie Mac, in one of four original posts on their new blog, explained that current rates are still extremely low compared to historic averages:
"The all-time record low – since Freddie Mac began tracking mortgage rates in 1971 – was 3.31% in November 2012. Conversely, the all-time record high occurred in October of 1981, hitting 18.63%. That's more than four times higher than today's average 30-year fixed rate of 4.32% as of March 20...rates hovering around 4.5% may be high relative to last year, but something to celebrate compared to almost any year since 1971."
If you are thinking of buying a home, waiting for a dramatic decrease in mortgage rates might not make sense.
Eric Belsky is Managing Director of the Joint Center of Housing Studies at Harvard University. He also currently serves on the editorial board of the Journal of Housing Research and Housing Policy Debate. This year he released a new paper on homeownership - The Dream Lives On: the Future of Homeownership in America. In his paper, Belsky reveals five financial reasons people should consider buying a home.
Here are the five reasons, each followed by an excerpt from the study:
1.) Housing is typically the one leveraged investment available.
“Few households are interested in borrowing money to buy stocks and bonds and few lenders are willing to lend them the money. As a result, homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor. Even a hefty 20 percent down payment results in a leverage factor of five so that every percentage point rise in the value of the home is a 5 percent return on their equity. With many buyers putting 10 percent or less down, their leverage factor is 10 or more.”
2.) You're paying for housing whether you own or rent.
“Homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord.”
3.) Owning is usually a form of “forced savings”.
“Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings to another day.”
4.) There are substantial tax benefits to owning.
“Homeowners are able to deduct mortgage interest and property taxes from income...On top of all this, capital gains up to $250,000 are excluded from income for single filers and up to $500,000 for married couples if they sell their homes for a gain.”
5.) Owning is a hedge against inflation.
“Housing costs and rents have tended over most time periods to go up at or higher than the rate of inflation, making owning an attractive proposition.”
We realize that homeownership makes sense for many Americans for many social and family reasons. It also makes sense financially.
In a recovering market, some sellers might be tempted to try and sell their home on their own (FSBO) without using the services of a real estate professional. The real estate agent is a trained and experienced negotiator. In most cases, the seller is not. The seller must realize the ability to negotiate will determine whether they get the best deal for themselves and their family.
Here is a list of some of the people with whom the seller must be prepared to negotiate if they decide to FSBO:
- The buyer who wants the best deal possible
- The buyer’s agent who solely represents the best interest of the buyer
- The buyer’s attorney (in some parts of the country)
- The home inspection companies which work for the buyer and will almost always find some problems with the house.
- The termite company if there are challenges
- The buyer’s lender if the structure of the mortgage requires the sellers’ participation
- The appraiser if there is a question of value
- The title company if there are challenges with certificates of occupancy (CO) or other permits
- The town or municipality if you need to get the COs permits mentioned above
- The buyer’s buyer in case there are challenges on the house your buyer is selling.
- Your bank in the case of a short sale
After the harrowing challenges experienced by so many homeowners over the last few years, many housing experts had predicted that the belief in homeownership as a major element of the American Dream would soon die. There is now conclusive evidence that these experts were wrong. As we reported back in September, The Joint Center of Housing Studies at Harvard University completed a study which concluded:
"The long term cultural preference for owning seems to have weathered the recent housing crisis."
Now, a second source recently announced similar results. Fannie Mae just released their National Housing Survey of Delinquent Mortgage Borrowers. The survey asked questions about the value of homeownership to the most sensitive of all groups – those delinquent on their mortgages. Here is what they found:
Of those delinquent borrowers:
- 74% still see homeownership as better than renting when building up wealth
- 71% still see homeownership as better than renting when saving for retirement
- 73% still see homeownership as better than renting for overall financial stability
- 80% still see homeownership as better than renting as an investment plan
- 70% still see homeownership as better than renting for creating an overall tax strategy
Homeownership has always been and will always be a crucial piece of the American Dream.
The Fed recently announced they would continue their current pace of purchasing bonds until the economy was stronger. This bond purchasing program is the reason that mortgage interest rates are at historic lows. Rates began to increase over the last several months just on the anticipation that the Fed would announce that they would be reducing the level of bond purchases last month. When that didn’t happen, rates actually decreased (4.50 to 4.37).
That was great news for any buyer in the process of purchasing a home. However, this window of opportunity is expected to close in the very near future as most experts expect the Fed to taper the bond purchasers in December. Even Ben Bernanke, Chairman of the Fed, suggested that the Fed could still scale back the stimulus this year. He stated:
"If the data confirms our basic outlook, then we could move later this year.”
Where will mortgage rates head in 2014?
The Mortgage Bankers Association, Fannie Mae, Freddie Mac and the National Association of Realtors have each projected that the 30 year fixed rate mortgage will have interest rates in excess of 5% by this time next year. The average of their four projections is 5.3%. The table below shows the impact this will have on the monthly principal and interest payment on a $250,000 mortgage:
Several government agencies are reviewing data to determine what will be the minimum down payment required under the new Qualified Residential Mortgage (QRM) guidelines scheduled to be revealed in the next few months. In the original Mortgage Market Note issued by the FHFA, it was suggested that loan-to-value (the percentage of the overall purchase price which was being borrowed) was a major factor in determining if a loan would default:
“For most origination years, requirements for borrower credit score and loan-to-value ratio are the factors that most reduce the ever-90-day delinquency rate of mortgages acquired by the Enterprises that would have met the proposed QRM standards.”
The note then made the following proposal:
“An LTV ratio qualified residential mortgage must meet a minimum LTV ratio that varies according to the purpose for which the mortgage was originated. For home purchase mortgages, rate and term refinances, and cash-out refinances, the LTV ratios are 80, 75, and 70 percent, respectively.”
Basically, the original note suggested that a 20% down payment should be the new guideline. We realize that there has been much debate on this issue since and that the minimum down payment required under the new QRM guidelines will probably be less than 20%. However, we can’t know for sure.
Bloomberg reported last week:
“The six regulators drafting the separate QRM rule, including the Department of Housing and Urban Development, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, must decide whether to include such a requirement -- and whether to make it less than the 20 percent they originally proposed.”
Will it be more difficult to qualify for a mortgage after the new QRM rules are announced? Probably
As David Stevens, President of the Mortgage Bankers Association said during a speech in Washington on Jan. 16:
“I have consistently warned of the regulatory tidal wave to come and it’s finally upon us. These changes will impact business operations and the future of mortgage access for years to come.”