It’s getting down to crunch time for many home buyers. With a little over a month and a half left on the calendar, many are asking the question: “Should I buy a house now, or wait until 2014?”
Obviously, much will depend on your financial situation. You shouldn’t take the plunge until your finances are in order. That includes the funds for your down payment, closing costs, and other home-buying expenses. With that being said, there are some compelling reasons to buy a home sooner rather than later. Here’s what you should know about buying a house in 2014.
1. Rates Will Likely Be Higher
Most analysts expect mortgage rates to be higher in 2014 than they are now. The benchmark 30-year rate is currently 82 basis points (0.82%) higher than it was at the beginning of 2013. It could rise even higher in 2014.
Frank Nothaft, chief economist for the government-controlled mortgage buyer Freddie Mac, recently predicted we would see 5% mortgage rates by the middle of 2014. He told Gil Gross, host of the radio show Real Estate Today: “So if you were to try to pin me down, I would say by the middle of 2014 we will see 30-year fixed-rate mortgages up around 5%.”
What’s feeding these predictions? It has a lot to do with the Federal Reserve. The Fed is on the verge of scaling back its long-running stimulus program, known as quantitative easing (QE). When that occurs, we will almost certainly see an additional rise in interest rates. The Fed is expected to wind down the program sometime next year. Buying a house in 2014 could be more expensive, due to higher interest charges on home loans.
2. New Lending Rules Will Create New Obstacles
I recently explained three new mortgage lending rules that will be rolled out in January 2014. These rules could create new obstacles for some borrowers, and may put financing entirely out of reach for others.
Home buyers will have to provide more documentation next year. Among other things, the new rules require lenders to thoroughly verify the borrower’s financial ability to repay the loan. Lenders will do this by requesting a slew of documents relating to income, assets and debts. We are already seeing a trend toward increased documentation, though the rules don’t take effect until January 2014.
Borrowers who are planning to buy a house in 2014 should also take a close look at their debt situation. The forthcoming rules (particularly the Qualified Mortgage / QM rule) will limit many borrowers to a debt-to-income ratio no higher than 43%. Granted, some lenders will still offer loans outside the parameters of these new rules. But those “non-QM” loans will be few and far between. Lenders have a strong incentive for embracing the new regulations. They get legal protection from consumer lawsuits.
3. Fewer Homes Will Be Available in Many Areas
An inventory crunch is occurring in many local housing markets across the country. This trend will likely continue into the first half of 2014, at least. In short, more home buyers will have to compete for fewer properties. Not only does this make things more stressful for buyers — it also puts upward pressure on home prices. See item #4 below.
That’s not to say inventory is shrinking everywhere. In fact, some of the housing markets that were experiencing significant inventory reduction a year ago are now “growing.” So it will vary from one market to the next. But in most of the country, there will be fewer homes for sale in 2014 when compared to 2013. Anyone buying a house in 2014 should research inventory trends at the local level, within the city or metro area. This is the key to understanding local market dynamics.
4. Home Prices are Probably Rising in Your Area
The S&P/Case-Shiller Home Price Index published at the end of October showed rising home prices across the U.S. According to David Blitzer, Chairman of the Index Committee, “Both Composites showed their highest annual increases since February 2006.”
Here again, the trends vary from one city and region to the next. But experts agree that home prices will probably rise next year in most major cities across the U.S. Planning on buying a home in 2014? Better keep a close eye on local property values.
5. Conforming Loan Limits Will Drop
In 2014, federal regulators are expected to reduce the maximum size of mortgage loans eligible for purchase by Fannie Mae and Freddie Mac. These “conforming” loan limits, as they are known, have a strong influence over the mortgage market as a whole. Loans above these established limits are considered “jumbo” loans, and are more costly and harder to obtain.
Currently, Fannie and Freddie will buy mortgages up to $417,000, or up to $625,500 in certain high-priced markets like San Francisco and New York City. We don’t yet know how far the limits will drop. The Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, hasn’t yet finalized the details — or at least hasn’t publicized them.
Last month, an FHFA spokesperson said that a “gradual reduction in loan limits is an appropriate and effective approach to reducing taxpayer’s mortgage risk exposure,” adding that additional details would be announced for implementation on January 1, 2014. Chalk it up as one more area of uncertainty for 2014 home buyers.
Have questions about buying a house in 2014? Check out our brand-new Q&A forum at QualifiedMortgage.org.