5 Most Important Housing Market Trends, as We Head Into Summer 2014

The U.S. housing market might not have returned to “normal” yet, as most experts would define the word. A significant portion of homeowners are still underwater, among other issues. But few can deny that the current housing market is in much better shape than, say, three or four years ago. It’s a slow, steady improvement — but an improvement nonetheless.

Below, we have compiled five of the most significant housing market trends as we head into the summer months. These five factors will fuel supply and demand more than anything else.

1. Lowest foreclosure rate in years.

Foreclosures have been a blight on the housing market for years, ever since they began to surge in 2007. Foreclosures create a “double whammy” for home prices, creating inventory surpluses and flooding markets with bargain-priced homes. Both of these trends lower property values over time.

The good news: In March 2014, foreclosure starts fell to their lowest level in more than seven years. This is according to a recent report from Black Knight Financial Services, a mortgage research firm. A foreclosure “start” occurs when lenders initiate the formal process of foreclosing on a home, typically with a notice of default (NOD).

This trend means there are far fewer homes entering the foreclosure pipeline today, compared to recent years. This creates another “double whammy” situation — but this time, both whammies are good. A sharp decline in foreclosure starts should lead to healthier inventory levels in local housing markets across the country, with fewer distressed properties to drag down home values.

2. Unemployment could soon fall below 6%.

Job growth creates a larger pool of home buyers. It gives more people the financial ability to buy a house. The housing market is at its best during times of low unemployment and job-market growth.

The good news: The U.S. economy added 288,000 jobs in April, according to the Department of Labor. That was the biggest monthly gain in over two years, and it brought the unemployment rate down to 6.3%. The way things are going, the jobless rate could drop below 6% within the next few months.

Here are the unemployment rates for the last four Aprils:

  • April 2014, 6.3%
  • April 2013, 7.5%
  • April 2012, 8.2%
  • April 2011, 9.1%

Granted, this is a labor trend more than a housing market trend. But the two things are connected. Jobs enable people to buy homes, and home-buying activity creates more jobs (particularly in construction, manufacturing, and other home-related services). It’s a positive cycle that strengthens the economy as a whole.

3. New mortgage rules caused a ripple, not a tsunami.

In January 2014, the Consumer Financial Protection Bureau (CFPB), a federal agency created in the wake of the Great Recession, introduced a new set of rules designed to make mortgage lending safer. These rules discourage the use of risky loan features, like interest-only payments. They have also standardized the income and document verification process used by mortgage lenders.

The good news: Some feared the new rules were “too much too soon,” and that they would undermine the fragile recovery taking place in the housing sector. In fact, most mortgage lenders had already implemented these practices (avoiding risky products and verifying assets) before the rules even took effect. We spoke to some of them, and most agreed that the new rules have not curtailed their lending.

How does this relate to the broader housing market? It means well-qualified borrowers will still be able to get a loan in 2014, just as they could before the new rules took effect.

4. Mortgage rates will likely continue to rise, but very gradually.

Mortgage rates influence housing market trends by raising or lowering affordability, thereby affecting demand. When rates rise significantly, mortgage applications (and the home purchases they enable) tend to decline.

The good news: Economists are predicting rising mortgage rates through the end of the year. But they expect that increase to be very gradual. So there’s no need to rush out and get a mortgage for fear of soaring interest rates.

Rate trends as of May 8, 2014

Earlier today, Freddie Mac reported that the average rate for a 30-year fixed mortgage fell to its lowest point since the week of November 7, 2013 (seen in the middle of the chart above). The 30-year average is currently 32 basis points (0.32%) lower than it was at the start of 2014. This bodes well for the housing market as we head into the summer months, when home-buying activity tends to surge.

Granted, rates are higher today than they were a year ago — and they will likely be higher still at the end of 2014. But economists are forecasting a gradual upward slope, instead of a spike. Over the next few months, low rates will continue to drive demand for housing while maintaining affordability for millions of Americans.

5. Inventory shortages less of a problem today.

Inventory shortages have plagued many local housing markets over the last few years. Shortages were most common in markets with a high degree of investor purchases — markets like Phoenix, Las Vegas, and many California cities. Such shortages lead to unsustainable price increases and make it harder for buyers to find homes.

The good news: Housing inventories are returning to healthy levels in many parts of the country. A recent report from Realtor.com® showed that the number of homes for sale (on that particular website) rose by nearly 10% from March 2013 to March 2014.

According to Steve Berkowitz, CEO of Realtor.com’s parent company Move, Inc.: “While inventory is still low, the continuing annual lift in the number of homes on the market that we’ve seen over the first months of 2014 is an indicator that buying conditions this year may be notably improved from the frenzied pace of last spring.”

These are the housing market trends to watch, as we head into summer 2014.