To get a better sense of what home buyers and sellers can expect in the coming year, we attended this year’s Greater Boston Association of REALTORS® (GBAR) Economic Expectations housing market forecast. Lawrence Yun, Ph.D., Chief Economist and Senior Vice President of Research at the National Association of REALTORS® (NAR), was the featured speaker at the forecast program.
Yun highlighted several key issues that will have an effect on the real estate market in the coming year, including rising interest rates, low housing inventory levels, and tight credit guidelines.
Mortgage Interest Rates Will Rise
Yun says we can’t expect the same kind of growth for existing home sales as we have seen in the past 2 years due in part to higher home prices and reduced affordability.
One trend that will affect home affordability in the coming year is the rise in interest rates. Rates have been increasing slowly since their historically low levels earlier this year. As of this writing rates are 4.42%, a full point higher than they were last November. By the end of 2014, Yun says mortgage rates are expected to rise to over 5%.
This will have an impact on home buyers. For instance back in May, when the average conventional rate was at 3.54%, a monthly payment on a $350,000 loan would be $ 1,579. With today’s rate of 4.42%, the monthly loan would increase to $1,757, a difference of $178 a month. By the end of 2014, the monthly payment for that same house would jump to $1,944, a $365 increase per month compared to this past spring.
This is why people looking to buy a home should not wait and start shopping for a home now. Keep in mind interest rates will not only affect what you will end up paying each month, it will also affect how much you will be approved for. With higher rates you won’t get approved for as much. For instance, if you were approved for a maximum of $350,000 at today’s rates, in the spring when rates go up, you would only be approved for a maximum of $325,000.
Home sellers should also get into the market sooner rather than later. Right now there are fewer homes on the market, so your home will get more attention from buyers. And as we mentioned above, buyers currently have more purchasing power than they will when rates go up in the spring. Lower rates will also benefit you once you sell your home and purchase a new one.
How banks react to the drop in the refinancing market due to rising interest rates is another factor to watch in the 2014 housing market. Banks profit from refinancing, so in order to stay profitable they may be more willing to increase purchase applications, but they will have to loosen credit guidelines to encourage more home buyers to come into the market.
Back in the early 2000s, average credit scores needed for Fannie/Freddie home loan approval was 720. For FHA loans, it was 650. However, in response to the housing crisis, from 2009 to 2012 those required scores rose to the 760-770 range for Fannie/Freddie loans, and 680-700 range for FHA loans. According to Yun, if the credit scores returned to what they were in the early 2000s, then there would be 20% more buyers who would be able to obtain financing than are able to now.
Home Prices Going Up
Household incomes have not been able to keep pace with median home prices, which in Boston have increased 8% from one year ago, and are expected to rise 6% in 2014.
New home construction is at a 50 year low, which has driven home prices up and limited choices for buyers. Yun says housing starts need to reach 1.5 million in the U.S. or there will be a persistent housing shortage. Although there have been modest increases in construction, it is difficult for smaller builders to get construction loans since they are not federally guaranteed.
With fewer affordable homes being built there are more renters than before. This is driving up rental prices making multi-family homes more attractive to investors, who are becoming a larger share of property owners.
As home prices rise, more home sellers will enter the market. With fewer buyers looking before the spring and making offers they won’t be competing with them.
Yun says conditions to buy a home are still the fifth best in the past 40 years. As we reported last month, now is the best time to buy a home before rates increase and before more buyers enter the market in the spring.
What Home Buyers Are Looking For
In the coming year, slightly more home buyers (14% this year compared to 8% in 2011) will be looking at condos rather than single-family homes. NAR reports “privacy from neighbors” as one of the most important factors when deciding where to live (46%). Good schools came in second (45%), and places to take walks came in third (37%). Having a short commute as well as public transportation are also important factors when home buyers are choosing where to live.