Real Estate Market Predictions for 2014 – Housing Forecast, Outlook and Trends
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Is it too soon to offer housing market predictions for 2014? I think not. After all, most home buyers start the research and planning process months before they actually buy a home. And they have questions upon questions:
What will home prices do in 2014? Will mortgage rates rise or fall next year? Which way is the market moving? Will it be a good year to buy a home?
These is no way to answer these questions with complete accuracy. But we can get close. We can use current trends to make an educated guess about future trends. With that in mind, here is our real estate forecast and outlook for 2014.
8 Housing and Real Estate Market Predictions for 2014
One thing is certain: 2014 will be an interesting year for the real estate industry. The housing recovery will continue to spread across the country. Some cities will see home-price appreciation for the first time in years. And a new set of mortgage rules will emerge. Here are some of our housing market predictions, projections and expectations for 2014.
1. Home prices will continue to rise in most U.S. cities.
According to the S&P/Case-Shiller Home Price Index, house prices in the U.S. rose by more than 12% from July 2012 to July 2013. Those were the most recent numbers at press time, due to a two-month reporting lag with this particular index.
Granted, that number is based on their “20-City Composite,” which tracks prices in 20 metropolitan areas across the country. So it doesn’t account for some of the troubled spots where prices are still flat. Still, it is a reasonably good indicator of what is happening across the country at present.
Our housing market prediction for 2014 calls for a continuation of this trend. We forecast additional price gains in 2014, for most U.S. cities.
Some cities, like many in California, could post double-digit gains in 2014 as they did in 2013. Other cities, including many on the East Coast and in the Midwest, will see only moderate gains. But the overall national trend will be upward.
In August, Zillow published the results of its ongoing survey of 106 economists. In the latest survey, “panelists said they expected [home price] appreciation rates to slow to roughly 4.4 percent in 2014.” Zillow’s real estate market predictions take into account the pros of rising demand and market stability, as well as the cons of negative equity.
Predictions and forecasts from the National Association of Realtors (NAR) mirror those made by Zillow. Lawrence Yun, NAR’s chief economist, said he expects home prices to rise by about 5% nationally in 2014.
So here we have two reputable sources predicting price gains of 4% – 5% in 2014.
2. The hottest markets of 2013 will cool in 2014.
In 2013, housing markets in Sacramento, San Francisco, Las Vegas, Phoenix, and a handful of other cities saw record-breaking gains in home prices. In Sacramento, for example, the median sale price rose by more than 37% from September 2012 to September 2013, according to Zillow.
Our prediction is that real estate prices will cool significantly in these leading markets. Home prices will continue rising in these cities throughout much of 2014, if not through the entire year. But they will rise at a much slower pace than before.
Inventory has a lot to do with this. The hottest markets of 2013 all had one thing in common. Okay, two things. Inventory levels declined sharply at a time when demand was rising among investors and regular home buyers alike. In 2014, housing inventories will level off in these cities, as they’ve begun to do already. This will take some of the steam out those rapid price gains.
According to Jed Kolko, chief economist for real estate information website Trulia:
“After rising rapidly in the first half of 2013, asking prices in two thirds of the largest metros are cooling. In fact, asking prices are falling — not just rising more slowly — in 11 of the 100 largest metros.”
Recent data compiled by property-valuation firm Veros supports this prediction. In its latest market forecast, the company stated: “Though these [hottest] markets remain strong, a few are experiencing a bit of a cool down from last quarter’s forecast.”
But this will not be a national trend. As you’ve noticed, our 2014 real estate predictions are regional in nature. There is a good reason for this, which we will discuss in housing market prediction #3…
3. Local economics will drive housing trends in 2014, as they have since the market crashed.
Over the next 12 to 14 months, we will see continued regionalization in terms of housing trends and conditions. The national housing market does not march in lockstep anymore (whether it ever did is debatable). Ever since the real estate crash, we have seen a wider divergence in economic and market trends, from one region of the country to the next. Consider the vast differences between Atlanta and Phoenix that existed in July 2012.
The bottom line: You can’t make a single housing market prediction for 2014. These days, it’s all about micro-markets and regional variation. For instance, the major metros in Texas will probably all have a good year in 2014 — strong demand, stability, steady price growth. Home prices in some Midwest, Gulf Coast, and East Coast cities could remain mostly flat in 2014. Location, location, location.
4. Florida’s housing market will be one of the big stories of 2014.
In 2013, housing markets in California, Las Vegas and Phoenix generated an inordinate amount of news coverage. Inventory plummeted in these areas, driving home prices upward at a headline-generating pace. Many California cities posted annual price gains of 20% or more over the last 12 months.
In 2014, Florida’s real estate market will move into the media spotlight, edging out some of last year’s headline hoggers.
Housing inventory is dropping sharply in some of Florida’s major cities. In Naples, for example, the total number of property listings on Realtor.com dropped by nearly 22% over the last year or so. Inventory is also declining in Fort Lauderdale, West Palm Beach, Daytona Beach, and other cities. At the same time, housing demand is rising across the state, partly due to job gains and other economic improvements. It will be a market to watch in 2014.
5. Investors will back off, leaving more room for “regular” buyers.
The following real estate prediction should come as good news for home buyers. In 2014, buyers who are purchasing a home as a primary residence should face less competition from investors and investment firms.
Real estate investors tend to swoop in when markets bottom out, and then withdraw as prices rise. That is what we are seeing right now, especially in those cities where prices have been rising steadily for some time.
In the hottest housing markets, home buyers have had to compete with individual investors, firms, and real estate investment trusts (REITs). Regular, mortgage-reliant buyers have a hard time competing with investors who make all-cash offers. This was a common source of frustration over the last couple of years, for many entering the market.
But this will be less of a problem in 2014. Investors have to get a return on investment (ROI) that makes them happy. The more prices rise, the harder it is to score that kind of ROI.
House flipping in the U.S. — the act of buying, refurbishing, and reselling a home within a short period of time — has declined by 13% over the last year, according to RealtyTrac. Purchases from overseas investors have also declined. That’s because the “deals” are disappearing.
We expect to see a continuation of this investor pullout over the coming months. It relates to some of the other housing market predictions on this list, as well. For instance, less investment activity from overseas will contribute to the price cooling expected in some of the hotter real estate markets in 2014.
6. Market conditions in most cities will continue to favor sellers over buyers.
In 2014, buyers in many U.S. cities will have to compete for fewer homes. Even with the gradual reduction in investment activity (prediction #5), housing demand will continue to strengthen over the coming months.
This comes at a time when inventories are still falling across much of the nation. According to Realtor.com’s monthly housing summary, property listings have declined in most major metro areas over the last year. This “shrinking” trend could expand to even more metros in 2014.
As a result of these trends, many local real estate markets will begin to favor sellers over buyers.
Cities that currently have sellers’ markets, like most cities in California and across the Southwest, will likely experience a continuation of the trend. But the price cooling mentioned earlier will make these markets less “extreme” and more balanced.
7. The QM rule will define the mortgage market.
This is a significant prediction for the average home buyer. So pay close attention.
Wondering what it will take to qualify for a home loan in 2014? Take a look at the Qualified Mortgage (QM) rule. It will soon set the bar for lending standards in the U.S. This rule was mandated by the Dodd-Frank Act, and finalized by the Consumer Financial Protection Bureau in January 2013. It will take effect on January 10, 2014.
At its core, the QM rule is designed to make mortgage lending in America less risky. It prohibits high-risk loan products and features, limits certain points and fees to 3%, and sets a debt-to-income limit at 43%.
Here’s our prediction for QM. The vast majority of loan products and programs will be aligned to the QM definition. In fact, the industry is already moving in this direction.
The Federal Housing Finance Agency (FHFA) has already said it will direct “Fannie Mae and Freddie Mac to limit their future mortgage acquisitions to loans that meet the requirements for a qualified mortgage.”
Additionally, the Department of Housing and Urban Development (HUD) recently announced it will “define all FHA-insured single family mortgages to be qualified mortgages, except for reverse mortgages insured under HUD’s Home Equity Conversion Mortgage (HECM) program.”
Our forecast: The QM rule will define the lending industry — and, by extension, the national housing market — as we move into 2014.
8. Mortgage rates will rise above 5% sometime in 2014.
From May 2 to August 22 of this year, the benchmark 30-year mortgage rate climbed 123 basis points (1.23%). This led to a decline in loan applications and a subsequent easing of lending standards.
Rates have leveled off since then. There has been much less volatility over the last few weeks. But there’s a major event soon to take place that could push mortgage rates higher in 2014. It has to do with the Federal Reserve’s QE3 stimulus program.
Since fall of 2012, the Fed has been purchasing $85 billion per month in Treasury and mortgage-backed securities. They’ve also kept the federal funds rate near zero for months. These actions drove mortgage rates to record lows in 2012, and have held them at historical lows since then.
But the end of QE3 is near. Fed officials are expected to begin tapering the stimulus program later this year, or early in 2014. This will likely lead to a rise in mortgage rates next year. Frank Nothaft, chief economist at Freddie Mac, expects to see 5% mortgage rates sometime around the middle of 2014.
Disclaimer: This article contains a variety of mortgage and real estate market predictions for your prognosticating pleasure. This forecast was based on current conditions within the housing market, at the time of publication. Such conditions can change over time. These predictions for 2014 should not be viewed as facts or assertions. They are the equivalent of an educated guess.