Should We Be Too Cautious About The Housing Market This Year?

While the housing market has continued to gain its strength, many are still a little weary of what could happen in 2014. There are many factors that could create a small downfall in the housing market, but “rising home prices, low mortgage rates and ‘significant pent-up demand’ will boost the housing market this year.” Says NAHB Chief Economist David Crowe. Crowe also mentions the factors that could very well be holding back home construction itself saying that “The pace of the recovery could be stronger were it not for rising construction costs and inaccurate appraisals that are keeping some home sales from going through.”

A major factor we have seen with the housing market is with mortgage rates. Last summer when mortgage rates rose, the market lost a little steam power. With the fed cutting back its bond-buying program from $85 billion a month to $75 billion a month, there will be a bit of caution knowing that this decision will cause mortgage rates to rise. But with this choice the Fed has made, they believe it will help “the cumulative progress toward maximum employment and improvement in the outlook for labor market conditions,” the Federal Open Market Committee said.

As our economy has slowly grown out of the housing bubble bust a couple years ago, I believe we should not be too optimistic for 2014. The facts have shown that when mortgage rate rise, the housing market loses momentum. Currently, the average rate on a 30-year fixed mortgage is about 4.51%. Even though that rate is considered low, mortgage rates are sure to rise as the Fed gradually reduces its monthly bond purchases.  Lawrence Yun, a leading industry economist, “expects rates to rise a pointe by the end of this year to 5.5%. “The higher borrowing costs—coupled with rising home prices—are a concern because they could make homes less affordable for potential home buyers, ultimately hurting sales.” With higher construction costs being one factor, home builders have “lost confidence in all three components of the index: current sales conditions, future sales expectations, and traffic of prospective buyers.”

Over the next couple of months, I would expect the housing market to go down while mortgage rates rise. However, as we see mortgage rates rise, we should look for unemployment to go down. From this I believe that the overall effect of the Fed cutting its bond-buying will help the housing market. It may not be within the next 6 to 8 months, but towards the end of 2014 we should look for more of an upswing.

8 thoughts on “Should We Be Too Cautious About The Housing Market This Year?

  1. gkugler

    I think you raise an extremely important point about interest rates. During QE, the Fed purchased long duration treasuries in order to push down the yield. Long term treasury yields correspond to interest rates on mortgages, which tend to be long duration as well. Thus, QE made taking out a mortgage to buy a house incredibly affordable (due to a very low interest rate). Now that the Fed has begun tapering, long duration treasury yields are already rising in anticipation of rising interest rates. With respect to the housing market, the corresponding rise of interest rates on mortgages certainly makes purchasing a house less unattractive than a few months ago. However, the logic of the Fed is that the economy is improving and this will eventually make consumers feel wealthier so that they are willing to purchase houses and take on mortgages with slightly higher interest rates. Interest rates are not historically high by any means and in the context of an improving economy I think consumers will still be able to afford mortgages.

  2. gaochen

    I agree with you that the mortgage rate is going to increase. However the housing market might not be very bad in 2014. Many people see an increasing home prices, so they might think it is a good chance to invest in the real estate before they can’t afford it. New home market still have opportunity to grow. It hit an annual pace of 464,000 in November which is 17% higher than one year ago.

  3. cjamesj

    I think that worries about the housing market may be unnecessary and over simplified. It is true that we are expecting higher interest rates and with that higher mortgages, however these are responses of the Feds QE. And the QE is a sign that our economy has recovered from the recession on 2009. So although there will be higher interest rates, I think enough people have rebounded out of their personal recessions and will still be looking to purchase new homes in 2014.

  4. jhchamot

    I also agree mortgage rates will increase, and that the overall effect will be positive. People are starting to gain confidence in the economy again, and I think investment in real estate will increase in anticipation of rising prices (specially for foreigners and investors). Also, this is a much better path to follow than the one leading up to the housing bubble burst- so it’s a good thing.

  5. wyna

    Along with the rest of the post, I also think that the mortgage rate is going to rise. Nonetheless, I think people will still invest in real estate as they have stronger confidence in their personal finance as well as US recovery from major financial crisis the world saw since 2008. QE tapering is also another queue that US economy, along with the real estate market, can stand on its own to propel itself.

  6. alexfigu@umich.edu'alexfigu

    I think it is apparent that the mortgage rates will rise, but I think the housing market will be tied more to consumer confidence and confidence in the overall government. If the economy continues to strive we should see incomes increase and this will likely help the housing market.

  7. viczhou

    We cay say for sure that the QE tapering will drive up mortgage rates and relatively, the housing market will go down due to higher borrowing cost. Meanwhile, as you mentioned, the tapering would also signal improving economic fundamentals, which is a big plus for the housing market. Therefore, I believe the ultimate effect of tapering will be positive.

  8. bdinger

    Mortgage rates will rise yes, but also remember that the FED seems pretty intent to ease off on treasuries first and MBS’s second so the rising rates this year may not be quite as pronounced as some expect. I think you will get some people running into the housing markets because they missed out last year, but I also think that things will be quite slow in the start of ’14 due to the weather.

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