With the New Year only days away, we thought it would be a good idea to look ahead to the future of the residential real estate market in the coming year. The strong housing market recovery in 2013 was a welcome surprise for many. Prices have risen about five percent countrywide, while some markets in the West have seen almost twenty-five percent growths in prices. Meanwhile, interest rates have risen above their historic lows. These trends will continue in the next year, albeit with less intensity.
The online real estate website, Zillow, estimates that while housing prices rose by five percent nationally in 2013, prices will rise by a more modest three percent in 2014. The greater increases of the last year are responsible for some of this slowdown. The National Association of Realtors states that home affordability is at a five-year low, so the demand for house sales is decreasing. As a result of higher home prices, new construction has become more appealing to builders who have increased production capacity. Another factor that will temper the growth of home prices is that cash-only buyers are becoming rarer. In 2012, half of all purchases were from cash-only buyers who were primarily investors insensitive to interest rates. Since more buyers going forward will be financing purchases, their sensitivity to increasing interest rates will also slow real estate price growth.
Along with modest growth in home prices, experts also predict modest growth in interest rates as well, with conservative estimates of 5% interest rates for 30-year fixed mortgages by the end of the year. As we mentioned in our post about the housing market this past August, the Federal Reserve’s announcement that it would “taper off” its asset purchases caused interest rates to rise from around 3.5% to 4.5%. Since that time, the Fed has begun to implement the taper at a gradual pace, and the markets have reacted favorably with interest rates still around 4.5%. As the policy continues and the economy improves, the interest rate should move higher toward historical norms. Before the quantitative easing policies were implemented in 2008, the 30-year fixed mortgage rate was 5.8%, which was then a low not seen since 1972.
Although mortgages will be for more expensive houses with higher rates, they may also become easier to obtain. Since refinancing will become less attractive for homeowners with the higher rates, banks are expected to compete more for the origination of home loans. Countering this trend will be stricter rules from the federal government for details like income verification, which may decrease the number of people taking out home loans. So, does the start of the New Year have you thinking about your new timber frame home? If so, contacting the design team at Timberpeg is a great first step to ring in the year. Cheers to a great year!