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5 Aspects of The Housing Sector That Warrant Attention In 2014

Published on Thursday - January 16, 2014

2014 is already expected to deliver on its high expectations. Analysts familiar with the market have forecasted encouraging trends that should continue for the foreseeable future. However, as with any market, there remains a bit of uncertainty. Predictions are, for all intents and purposes, an educated guess. The only way to prepare for the upcoming year is to familiarize yourself with those aspects that remain ambiguous. Investors with a working knowledge of current trends will have an advantage over their competitors. Therefore, it is important to keep an eye on the following real estate developments:

1.) Will Inventory Rise?

Due largely in part to depleted inventory levels, home prices have experienced a steady increase. Despite encouraging inventory trends and what appears to be a looming buyers’ market, the number of homes made available to prospective buyers remains relatively low. The reintroduction of equity to nearly every major market has severely reduced the number of foreclosure listings. Moreover, new construction projects will continue to be suppressed by the price of the current market for the foreseeable future. These factors, and others, will likely result in price increases that are slightly less torrid than what we have come to expect. However, such a consensus could be wrong if inventories are not replenished.

2.) Where Is The Home-Construction Recovery?

2013 was the beneficiary of impressive price growth. However, new construction projects have failed to live up to expectations. Current market conditions don’t provide this particular industry with the economical environment it needs to thrive. In other words, home prices are still too low to justify construction costs (land, labor and materials). Construction companies of a smaller nature are also faced with tighter credit standards.

According to analysts familiar with the market, new-home demand may remain stagnant because of equity issues. The majority of move-up buyers don’t have enough equity to “trade up” to a new home. With that being said, 2014 will soon identify whether or not new-home starts have gained traction. Pay attention to household formations and price adjustments made by construction companies in favor of selling more homes. Their moves will indicate the direction of housing starts.

3.) What Will Happen To Mortgage Credit?

2014 is expected to host a myriad of changes within the housing sector. Among those changes are rumors of easement. More specifically, lenders may ease certain “overlays” that have been imposed in recent years. With the market on what appears to be a sustainable path to recovery, mortgage insurance companies are more comfortable insuring loans with smaller down payments. Confidence may translate into the easier acquisition of a mortgage for prospective buyers.

Even if obtaining a loan does become less convoluted—by no means a given—borrowing costs and fees could rise. Banks also face new mortgage regulations that could keep most of them cautious. Borrowers with more volatile or harder-to-document incomes, including self-employed investors, could continue to face tough underwriting.

4.) What Will Institutional Investors Do With Inventory?

Several well-established institutional investors have purchased tens of thousands of discounted properties with the intentions of renting them out. Current market conditions favor buy-and-hold exit strategies.

These homes tend to be concentrated in a few of the regions that have been hardest-hit by foreclosures over the past five years. Investor purchases played key roles in stabilizing prices, especially because investors were acquiring properties at a time when supplies were already low. However, what will happen after the initial rush to invest subsides? More lenders and investors are extending debt financing to some of these property owners, which should help boost returns. Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?

Doubt has already forced some of the larger investors to sell their homes, to smaller investors no less. With current market conditions being that which they are, large investors have been selling their properties to other investors as turnkey rentals. This trend may benefit investors of a smaller nature. Keep an eye out for institutional investors dumping properties.

5.) When Will Housing Affordability Reach A Tipping Point?

As you may already be aware, price appreciation is a double-edged sword, particularly in pricier metros like San Francisco and Los Angeles. On a positive note, equity has begun to return to the market. With assets now returning to their original value, borrowers are much less likely to foreclose on their property. However, with properties receiving a bump in value, it is important to note the decline in affordability. Price inflation makes it increasingly difficult for prospective buyers to find a home they can afford. This will be a bigger problem if cash buyers retreat from the market in 2014 and/or if interest rates rise in a meaningful way.

Consider: In Los Angeles, prices have jumped by nearly 30% in the past two years, to a median of $448,900 in the third quarter. Assuming a 20% down payment, the monthly payment of principal and interest on the median priced home has jumped from $1,255 in the third quarter of 2011 to $1,823 in 2013—a 45% increase.

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