The concept of a housing recovery is fraught with ambiguity, as its very definition leaves more than enough room for interpretation. That said; everyone is entitled to his or her own opinion as to the direction of the housing sector. After all, who is to say what home prices are actually conducive to a recovery? Perhaps even more importantly, exactly how many millennials need to participate before we can consider it a healthy market? Does anyone really know? There are just too many questions – each with a more subjective answer than the last. Conflicting reports regarding both economic and demographic indicators have become the norm. While the expansion of the economy is certainly healthy for the housing market, home prices and a lack of inventory could stall any efforts of a rebound. With 2015 upon us, where do we stand?
For the most part, those familiar with the market would have us believe that the housing sector is heading in the right direction. Nearly all of the jobs that were lost as a result of the recession have returned and a significant amount of equity has been infused into a desperate pool of homeowners. The country, for all intents and purposes, is better off than it was in the depths of the downturn. Of particular interest, however, is the means in which we are conducting ourselves. Are we, as a nation, making the right moves towards recovery?
While 2014 was generally revered as a good year, it was not without its own hiccups. By the fourth quarter, rapid appreciation rates and tight credit standards prevented potential buyers from actively participating. Millennials, in particular, found it incredibly difficult to overcome the wake of the recession. Saddled with student loan debt, intimidating down payments and strict underwritings, this entire population was essentially neglected.
It is important to note that 2015 is expected to be a good year in the housing market. However, there are several indicators that warrant our attention. In fact, the fate of the entire market could hinge on the following factors:
Credit continues to exercise an incredibly strong influence over the housing sector. However, it is particularly hard to gauge how it could impact the housing market in 2015.
As of January 26th, the Federal Housing Administration (FHA) reduced the amount buyers will have to pay in home insurance. Accordingly, those with a “low down payment” will only be required to pay 0.85 percent in mortgage insurance, as opposed to the previous1.35 percent. The move is expected to save buyers approximately $900 a year and possibly add upwards of 140,000 new buyers to the pool.
“It couldn’t come at a better time. February is the start of the spring market,” said David Stevens, CEO of the Mortgage Bankers Association.
In addition to reduced mortgage insurance premiums, both Fannie Mae and Freddie Mac have acknowledged that they will offer loans to those who come up with a down payment as low as 3 percent. Of course, the lower down payment requirement does coincide with strict criteria:
- The borrower must live in the home
- The borrower is required to have a FICO score of at least 680
- The borrower must have mortgage insurance
- The borrower must receive a fixed-rate loan (no ARMS)
- The borrower can not receive more than $417,000
- The borrower’s debt to income ration must not exceed 45 percent
The importance of a low down payment loan, now more than ever, can’t be underestimated. With costs as high as they are and interest rates still historically low, the market is counting on an influx of buyers. Some believe the millennial population will take advantage of the recent changes, but only time will tell.
Home Value Appreciation
For nearly three years, home prices have been the beneficiary of incredibly high appreciation rates. Homeowners from all corners of the country saw equity return to their properties. At the very least, many have finally received the breathing room they were hoping for. However, just as credit can go both ways, so can high home prices. Pricey markets are eerily similar to those that resulted in the previous bubble. As recently as 2013, it was not uncommon for home prices to increase by double digits. Houston and Austin, which were once viewed to be impervious to market fluctuations, have seen prices soar.
While prices continue to rise, there is no question that the rate of increase is beginning to ease. The slower rate of appreciation is due, largely in part, to a lack of distressed properties. The low end of the market has received less attention from investors as a result. Subsequently, all-cash sales have seen a significant drop.
Home prices have nearly returned to their pre-recession levels, and are once again making it difficult for younger populations to buy. Affordability is becoming an issue in major metros across the country. That said; the rate of appreciation is expected to slow down, but how much? A lot of what happens in the housing market will depend on how much home prices increase.
Lack Of Inventory
Both institutional investors and real estate entrepreneurs are finding value in buy-and-hold properties. With rents continuing to break records, the prospect of selling a home is less enticing. Homes have appreciated to the point that profit margins are no longer more attractive than rental units. Therefore, fewer properties are coming onto the market. While the move should keep prices somewhat stable, it does not solve the inventory problem we are currently facing.
By the end of last year, the United States had a five-month supply of homes available. According to those familiar with the market, the lack of inventory is likely due to pent up demand from millennials that want to buy, but can’t. Nonetheless, the lack of millennial participation will surely be something to keep an eye on this spring, as it is the time home buying tends to ramp up.