What do you Expect From The Real Estate Market In 2014?

Seven years have passed since the worst housing market crash in United States history triggered a global financial crisis. Lehman Brothers declared bankruptcy, and a host of other banks came close to joining them before being rescued in a series of shotgun mergers and acquisitions, the largest of which included Bank of America – Merrill Lynch, JP Morgan Chase – Bear Stearns, and Wells Fargo – Wachovia. Alongside bailouts and a beleaguered stock market, home prices continued to fall, foreclosure rates increased, and by the end of June 2010, it was estimated that nearly a quarter of all U.S. homeowners were underwater – a situation when a home is worth less than its outstanding mortgage. In the years since the crash and financial crisis, the housing market has been making a slow – and bumpy – recovery.

The Slow and Tenuous Recovery 

During the first quarter of 2012, an unsettling 31.4% of homeowners were underwater. Since then, however, about 5 million homeowners have been freed from negative home equity, thanks to rising home prices. Although that still leaves as many as 10.8 million – or 21% – of homeowners underwater as we approach the New Year, the number is expected to continue improving as the real estate market and broader economy continue to improve as well.

The housing recovery has struggled against disruptions to the broader economy. As we approach the end of 2013, Frank Nothaft, vice president and chief economist with Freddie Mac noted, “We’re likely going to see the housing recovery slow down, but not shut down, as we close out the rest of this year due to tight inventories in many markets, rising mortgage rates and slumping consumer confidence.” Looking to 2014, Nothaft said, “Fortunately, the housing recovery should continue to absorb the economic shocks in stride and improve next year.”

In addition, there is expected to be a shift in the coming year from a refinance-dominated mortgage environment to one driven by purchases – for the first time in over a decade. “With the close of 2013 will also come a major transition in the housing finance industry,” said Nothaft. “For the first time since 2000, we’re going to see the mortgage market dominated by purchase activity as the refinance share drops below 50%. And with mortgage rates rising, we’re also going to see the home-sales gains as well as the impressive house price growth begin to moderate to more sustainable levels.”

In the third quarter of this year, lender-initiated foreclosure action fell to the lowest level since the second quarter of 2006, according to foreclosure listing firm RealtyTrac, Inc. About 120,000 homes nationwide were taken back by lenders during this year’s third quarter, putting the country on track to end the year with about 507,000 completed foreclosures – down about 24% from 2012 numbers. The number of foreclosures reached a high in 2010 at 1.05 million, and since then rates have been declining.

As the housing market continues its recovery, we can expect a few things to happen in 2014:

• House prices will continue to rise, but at a slower rate than 2013.
• As home prices rise, more homeowners will emerge from being underwater, putting them in the position to finally buy and sell properties.
• Mortgages will be dominated by purchases rather than refinance activity, for the first time since 2000.
• Higher mortgage rates will slow home sales and price gains to more sustainable levels.
• Low inventories will be helped by an increase in new construction and a decrease in investor purchasing.

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