The 2014 Housing Outlook – Like Déjà Vu all over again?

In many respects the 2014 real estate market holds the promise of repeating last year’s stellar performance.  Low inventories and low interest rates propelled the 2013 market recovery, and while we’ve seen a modest rise in interest rates, inventories of homes for sale are still at very low levels.  Veteran market watchers are saying – praying? – we’ll see moderate growth this year, a welcome contrast to 2013’s ballistic recovery.

Here’s the background. . . . Home prices grew at the fastest pace in seven years in 2013, pushing up home prices nearly everywhere in the US.  And the recovery was fairly uniform: home prices rose in 225 of the 276 cities tracked by Clear Capital, a provider of real estate data and analysis. Prices nationwide increased by 10.9 percent (Portland saw a 12.9% increase).  In 2013, a sense of urgency drove traditional buyers hoping to take advantage of still-affordable home prices and historically low mortgage rates, while investors were drawn into the market by the scent of opportunity.  Buyers found selection limited and were often forced into bidding wars with investors and other buyers who paid cash. Sellers reaped the rewards in terms of quick sales, often above the asking price.

Almost half of the cities tracked by Clear Capital experienced double-digit increases in home prices, led by Las Vegas, with a gain of 32 percent. Such spikes reflected a continuing “correction to the overcorrection,” says Alex Villacorta, vice-president of research and analytics for Clear Capital. Buyers and investors rushed in to snap up homes with prices that had fallen too far.

It’s early 2014 and the story hasn’t played itself all the way out:  in spite of the big 2013 run up, homes continue to be affordable.  Nationwide, prices are still 31.5 percent below their 2006 peak; Portland, while making greater strides towards recovery than many parts of the US, is still 15% below its 2007 highs.  And while buyers may be
inclined to voice their complaint, “There just aren’t any bargains out there now!” we’re as likely to respond, “No, everything’s a bargain!  That’s why we have all this competition!”

While 2014 appears poised to repeat 2013, a number of trends – some present since last year, some new – are going to influence the market.  First we’ll give you a quick look at the trends that are going to influence the market positively.  Then we’ll tabulate the trends that will affect the market negatively, and summarize with our “best bet” for the market’s direction this year.

Positive Trends:

  • The Rise of the Millennial Generation.  The Urban Land Institute issued a forecast last month drawing attention to the growing economic influence of millennial buyers, particularly in Austin, Seattle, Portland and the Twin Cities.  This generation of young people, born between the 80’s and 2000, is in a home-buying mood, and they’ve set their eyes on metropolitan areas that favor innovation, a healthy start-up culture, and relatively low housing prices.  Hello Portland.  Add millennial buyers to “new household formation,” a trend we brought to your attention last fall, and we predict strong demand for Portland’s real estate market well into the foreseeable future.
  • Getting a mortgage is going to get easier.  Banking standards have been loosening incrementally the past year, making it easier for first-time buyers – and buyers who got stung with bad credit scores during the Recession – to qualify for a loan nowadays.  And a new financing path, dubbed “Shadow Banking” has opened up recently for underqualified bank borrowers.  In ways similar to traditional bank lending, the money sources – the Shadow Banking’s hodge-podge of private funds, wealthy individuals, investor consortiums, and so forth – are not traditional banks and can therefore get around onerous banking regulations.
  • More homes will flow into the market from the Shadow Inventory.  As a corollary to news that inventories of distressed homes are shrinking (see below), this year we’ll read more news that rising home prices will bring more and more home owners out from under the shadow of overburdening debt and back into the market.  At the bottom of the recession there were 12 – 15 million homeowners underwater; now, that figure has been sliced nearly in half.
  • New housing starts are not keeping up with demand.    Reporting in RISMedia news, Lawrence Yun, chief economist of the National Association of Realtors, notes that while we’ve seen a 30% increase in new housing starts this past year, the pace is still insufficient. Yun reports for all of 2013 housing starts look to finish at 930,000 units.  Existing home inventory is at a 13-year low while newly constructed home inventory is at a 50-year low. And the long-term, 50-year annual average is 1.5 million housing starts each year.  It will take years for the new construction industry to keep up with demands from a growing American population.  Demand for new housing is going to outstrip supply for several more years.

Negative Trends (that will inhibit home sales and price appreciation):

  • Mortgage Rates will continue to rise.  Many mortgage watchers predict rates will hit 5% by the end of 2014 – well up from the 3.25% bottom of the market last winter, but still well within normal levels. New Fed Reserve chief Janet Yellen is expected to continue Ben Bernanke’s policy of keeping mortgage rates low by buying blocks of mortgage-backed securities, but the Fed began to taper back bond-buying in the fall and all signs point to a continuation of this policy.  (See our October 2013 “Notes. . . .” for a discussion of the Fed’s move.)
  • Job growth is tightly linked to housing growth.  Really, this is news?  Not really, but job creation and job growth are going to be critical elements in the market again this year.  (Tidbit: job growth will have more effect on the lower ranks of the housing market; growth in the $750,000 to $1,000,000 housing market last year was attributed more to a healthy stock market than our local jobs economy.
  • Multi-family housing development will wane.  The 2013 apartment building boom may have peaked, and in some areas (Southeast Portland anyone?) there’s concern that there’ll be a bust.  In any regard, greater apartment availability may take some buying pressure off the market as units start to come on line as early as the second quarter of the year.
  • Inventories of distressed properties will continue to shrink.  The RMLS of Oregon reported February 10 that comparing 2012 to 2013, distressed sales as a percentage of closed sales decreased from 28.2% to 13.2%.  Bank owned/REO properties comprised 3.3% of new listings and 5.2% of sales in 2013, decreasing from 10.4% and 15.9% respectively in 2012.  A reduction in distressed properties is a welcome sign of a sustainable recovery, but diminished number of distressed properties will limit opportunities for first-time buyers and investors and put more pressure on our entry-category housing stock.

What’s in store for 2014?  Let’s look back in September to February and how the interplay of all these trends has built the 2014 market.  From our perspective we believe that strong buyer demand, weak inventories and relaxed lending standards is going to outweigh the threat of higher mortgage rates and weak job growth.  We’ll report!