Source: U.S. Army Corps of Engineers Europe District.
After an excellent 2013 with double-digit year-over-year housing price gains, many experts believe the rally in housing is about to slow down. While there are reasons to follow the herd, there are also a few scenarios that could produce the opposite result.
Let's take a look at the reasons for the pessimism surrounding housing in 2014 and a few scenarios that could produce another double-digit rally.
Why the experts are pessimistic
Higher rates and new lending laws are the two main reasons experts are expecting the rally to fade.
Interest rates spiked by around 1% during the second half of 2013, but they remain at low levels relative to recent history. Currently sitting at around 4.5%, the Mortgage Bankers Association expects rates to climb to around 5% by the second half of 2014. The fear is that this could cause a reduction in home purchases as mortgages become less affordable to average buyers.
As far as legal issues are concerned, the Qualified Mortgage rule went into effect on January 1. Simply put, the law sets tighter requirements for lenders in order to avoid potential lawsuits from borrowers who become unable to pay for their homes.
There are requirements for a loan to be "qualifying," including stricter income requirements. The fear with these types of loans is that mortgage credit will begin to tighten, making it tougher for people to qualify for mortgages (think 2009 standards).
A few things that could cause the rally to continue
Investors (who have been a driving force) could start to overlook higher prices as rents rise and the higher home prices become more justified. Investors also deal in cash more than other types of buyers, and cash buyers really don't care how high mortgage rates are.
Factors like the Federal Reserve's taper and positive economic data point toward rising rates. However, there is always that chance the taper has a smaller effect than expected, and a month or two of poor economic data could cause the Fed to more aggressively hold rates down.
It's also likely the mortgage market will actually ease credit standards and make it easier (but not too easy) for homebuyers to get a mortgage. While the income requirements and requirements such as no interest-only payments are pretty firm, down payments can vary, and so can the minimal acceptable credit score.
For instance, Wells Fargo and TD Bank are already offering non-FHA loan products with down payments as low as 5%, which have been very rare, if not nonexistent since the mortgage crisis. While a lot of Americans are taking measures to beef up their credit scores, having enough cash on hand for 20% down is not as common, especially for first-time buyers.
Looser down payment requirements will greatly increase the number of people who would qualify for a mortgage, and as we learned in the pre-crisis years, the easier it is to get a house, the more demand there will be, and the higher home prices will go. All the new regulations should ensure that the increased availability of mortgages takes place in a more responsible manner.
The most likely scenario
While mortgage rates may really have nowhere to go but up over the next few years, as long as the rise is gradual and controlled, it really shouldn't put too much of a damper on demand. With inflation well in control, the Fed has no reason to encourage a rapid rise in rates anytime soon.
Also, many markets across the U.S. are still not recovered from the crisis. Until homeownership and home prices reach historically high levels, increasing accessibility to home financing via low down payment loans will encourage buyers, particularly first-timers. While we may not see the double-digit percentage gains we did in 2013, a steady, robust rise in home prices is still quite possible for the foreseeable future.
