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There's no doubt about it: This has been a banner year for the U.S. economy. Steady improvements have brought about the much-anticipated tapering of the Federal Reserve's quantitative easing program, and unemployment dipped to 7% in the fourth quarter.
Housing has improved, too. Sales prices are recovering, and the nation's markets are slowly normalizing. In September, the National Association of Home Builders noted that 291 of the 361 metro areas the group monitors are now considered "improving housing markets," the highest since the NAHB began tracking this metric two years ago.
If you are thinking that 2014 might be the year to jump back into the housing market, however, you may be disappointed. The brightening economy, along with some new mortgage rules that will debut on January 10, could combine to make financing a home measurably more difficult in the New Year. Here are the two biggest threats to those planning to obtain a mortgage in 2014.
A stronger economy will decrease mortgage affordability
This may sound contradictory, but the healing economy has produced two scenarios that will continue to constrain home buying: rising home prices, and the beginning of the end of the Fed's easy money program, known as QE3.
With the foreclosure crisis receding, home prices have begun to rise as reduced inventory pushes prices upward. Overall, this is a good thing -- except if you are applying for a mortgage, which may have now become too expensive to be affordable.
Likewise, long-term interest rates have risen approximately 1.25 percentage points over the past year, and promise to go even higher now that the Fed will be winding down the program that has been instrumental in keeping 30-year mortgage rates low.
Rising home prices and climbing interest rates are already having a deleterious effect on the housing market. According to the NAHB, 69.3% of homes sold in the second quarter of 2013 were considered affordable to buyers making the median income of $64,400, while only 64.5% of homes sold during the third quarter qualified as affordable.
Qualifying for a mortgage will be more difficult
New mortgage rules promulgated by the Consumer Financial Protection Bureau will go into effect next month and could send a chill through the mortgage-lending sector.
The rules seek to prevent another subprime meltdown and require lenders to document borrowers' ability to repay loans. They also ban certain types of loan products, such as no-documentation loans, negative amortization, balloon payments, as well as points and fees that constitute more than three percent of the value of the loan.
Loans that embrace these parameters will be categorized as "qualified mortgages," and lenders will be protected from liability if borrowers default.
While the added protections are good for both lenders and borrowers, some analysts see problems for those meeting the 43% or less debt ratio, as well as the self-employed and retired -- two groups of borrowers that may have issues with documentation of income. Others note that the added paperwork and expenseare the same no matter the size of the loan, which may result in fewer lenders offering smaller loans of $150,000 or less, which would directly impact the first-time homebuyer.
A change for the better? Time will tell
Some aspiring homeowners recently received one piece of good news, courtesy of incoming Federal Housing Finance Agency Director Mel Watts. Watts, who is set to be confirmed in January, has postponed fee increases by Fannie Mae and Freddie Mac on borrowers with less-than-stellar credit or those unable to put down a full 20% down payment. Those increases had been scheduled to go into effect in March.
While higher interest rates are certain to squelch home lending, not everyone thinks that the new CFPB rules will have the same effect. The agency's Director, Richard Cordray, has commented that most loans being made already comply with the new rules.
It seems likely that there will be some tightening of mortgage credit due to the new rules, however -- which, combined with higher interest rates and rising home prices, will make obtaining a mortgage much more challenging in the coming year.
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