After a surge in home values in most cities in the past year, prices will increase more slowly in 2014.
The housing recovery has pushed up home prices nearly everywhere. In the past year, 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, pushing the median price for existing homes up by $30,000, to $215,000. For people who have waited to sell their home or refinance their mortgage, that's good news.
Rising home prices in Seattle enabled Mike and Kristin Litke to refinance their first mortgage last summer and pay off a second mortgage that had an 8.2 percent interest rate. The Litkes, who bought their three-bedroom, 1.5-bath home for $512,500 in 2007 at the peak of Seattle's housing market, had used the second mortgage to avoid paying private mortgage insurance. In 2010, just as home prices in the area hit a trough, they refinanced their first mortgage to a 30-year fixed rate of 4.375 percent but were stuck with the second mortgage because they didn't have enough equity to do a "cash-out" refi.
This time, however, their home appraised for $521,000, allowing them to refinance into one 30-year, fixed-rate mortgage of $416,800 at 4.25 percent. They have reduced their monthly payment by $360, giving them some wiggle room in their budget and providing an infusion of college-savings funds for their kids: Stephen, 3½, and Stella, 10 months.
In 2013, a sense of urgency drove traditional buyers hoping to take advantage of still-affordable home prices and historically low mortgage rates. 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. Homes continue to be affordable, despite recent run-ups — on average, prices are still 31.5 percent below their 2006 peak. The percentage of monthly family income consumed by a mortgage payment (assuming a mortgage rate of 4.1 percent) is just 15.6 percent, on average, compared with 23.5 percent in mid 2006.
"Houses are very cheap," says David Stiff, principal economist at CoreLogic, a property and mortgage-data analytics company.
Market observers agree that home prices will rise in 2014, but at a slower, more steady pace compared with historical trends. Clear Capital forecasts that home prices nationally will rise by 3 percent to 5 percent in 2014, about the historical average. Kiplinger expects an increase of 4 percent.
"The most notable thing about 2014 will be how un-notable 2014 is," Villacorta says.
Meanwhile, the Conference Board, a nonprofit association of businesses, found that the percentage of consumers who intend to buy a home in the next six months was the highest since 2000. Adding to the push: pent-up demand among young people who, hampered by lack of jobs or insufficient income, have been living in their parents' basements or sharing apartments with roommates. Celia Chen, a housing analyst with Moody's Analytics, says Moody's expects the economy to expand enough in the coming year to enable young people to begin moving out. They'll probably rent first, but low vacancy rates and higher rents will prompt some renters to move on to homeownership.
As home prices continue to rise, more owners who had been underwater — meaning that they owed more on their mortgage than their home was worth — will emerge from the sidelines and start selling and buying homes. CoreLogic reports that almost 3.5 million homeowners were lifted out of negative equity between the end of 2012 and mid 2013. Nevada, Florida, Arizona, Michigan and Georgia have the highest shares of underwater homeowners.
A sellers market
In the past year, sales of existing homes and condos rose by 11 percent, to 5.29 million — almost the highest level in four years. The National Association of Realtors expects sales to remain about the same in 2014. Sales nationally have increased across all regions and in all but one price category, signaling a broad-based recovery.
Although sales of entry-level homes (priced at $100,000 or less) have fallen by almost half in the past year in the West, they're still rising in the Northeast, where the job recovery has lagged behind other regions. Sales of homes priced between $750,000 and $1 million have risen the most.
"A consistent stock market recovery for a prolonged period has opened up the wallets of upper-income homeowners," says Lawrence Yun, chief economist for the National Association of Realtors.
Nationally, the supply of homes for sale stands at five months' worth. (Months' supply is a measurement of how long it would take to sell everything at the current pace of sales. A market balanced between buyers and sellers has about six months' supply of homes.) The current level slightly favors sellers, but in many cities inventory is much tighter. For example, the Washington, D.C., suburbs of Montgomery County, Md., and Northern Virginia had about two months' supply in September. Yun says the housing market has moved toward a shortage that will persist through 2014.
Why is inventory low?
In some cities, institutional investors have been scooping up properties to rent out. Plus, builders cut way back on new-home construction during the bust, and homeowners who bought at the top of the market are still reluctant to sell until they can recoup more of their investment. Some are still underwater, unable to pay off their mortgage with what they'd get for their home.
In Oakland County, Mich., in suburban Detroit, agent Melanie Bishop says home prices fell so far during the economic downturn that even longtime homeowners reaped little or no profit when they sold. But with the housing market's rebound, sellers' prospects have improved. She recently helped Corey and Suzy MacDonald sell the four-bedroom, 2.5-bath home in West Bloomfield that they bought in late 2006 for $272,000.
In the spring of 2012, Corey MacDonald became self-employed, and the couple decided to relocate to Florida. They listed their home for sale at $265,000, just enough to pay off their mortgage and expenses. The best offer they received was $245,000, so they decided to postpone their move and try again later. Last summer, they listed the home for sale at $289,900. On the first day, they received an offer of $310,000. "It was a perfect deal," MacDonald says. He ultimately took a job in Atlanta, and the couple used the proceeds from their Michigan sale to put down 20 percent on their next home.
The influence of investors will wane as the low-hanging fruit (including foreclosures) disappears in 2014. Once, whole cities were ripe for the picking — such as Cape Coral, Fla., and Phoenix in 2012, as well as Las Vegas and Atlanta in 2013 — but investors must now dig deeper at the neighborhood level, says Villacorta. That's a job probably best suited to smaller numbers of local investors who know their markets best.
Where will new supply come from?
Most people who list their homes for sale expect to buy another one, so it's a wash in terms of net inventory. According to the National Association of Home Builders, whose members retrenched during the bust, just less than half as many homes were started this year as in a normal market. NAHB forecasts that a normal pace of housing starts won't resume until late 2015. Tight credit, land and labor, as well as rising costs for materials, are constraining builders.
Distressed properties are still adding to the supply of homes nationally, but foreclosure filings are falling. Fewer homeowners are losing their homes as the economy improves, home prices (and home equity) rise, and lenders agree to more short sales (homes sold for less than their owners owe on their mortgages).
"We're in the home stretch of getting through the foreclosure crisis," says Daren Blomquist, vice-president at RealtyTrac, which monitors the foreclosure market. "But we won't cross the finish line, with filings back to pre-crisis level, until early 2015."