The housing market clearly has been through the ringer and back. Nearly 5 million foreclosures have been completed since September 2008, according to CoreLogic research, serious delinquencies are back at pre-recession levels, and the 12-month sum of completed foreclosures is lower than it’s been since 2008.
The question is, are we all the way back, or does the housing market still have some improvement left in it?
While the economists and housing market experts I’ve talked to in recent weeks are generally optimistic about real estate in 2014, they say the stubbornly poor performance of single-family housing is one of the major headwinds currently facing the market.
But as banks start lending to builders again, the incentive that developers currently have to build expensive homes or large apartment buildings will give way to the increased supply of single-family homes.
“The housing market is going through a strange phase right now, and probably will continue to do so in 2014,” Andy Carswell, associate professor of Housing and Consumer Economics at the University of Georgia, recently told WalletHub.
Staying plugged in to the housing market’s major trends is the only way to effectively strategize for what’s to come in the year ahead.
HIGH PRICES, LOW INVENTORY AND NEW REGS
There are a number of explanations for the lagging performance of single-family housing, according to Elliott Eisenberg, former senior economist with the National Association of Home Builders.
“First-time homebuyers are kind of MIA, new home prices are very expensive, and the builders are building really to the upper-middle and upper classes right now,” he says. “There’s no money at the lower end of the middle classes, so you don’t have a lot of huge sub-divisions catering to first-time homebuyers.”
The near future doesn’t hold too much promise for improvement either, with the new QRM rules now in place, creditors taking longer to close on loans, and appraisers under more scrutiny than ever.
“Some of these folks will get non-conforming loans, but there’ll be a little bit of a credit crunch going on,” Eisenberg says. “So, it seems hard to imagine the single-fam side really exploding in 2014, given the income disparities, and low wages, and the credit crunch, and so on.”
MAKING THE MOST OF LOTS
Much of the blame for high prices and lacking growth within the single-family sector also can be ascribed to a simple lack of inventory. Experts say there is an impending shortage of available lots because banks haven’t really been lending to builders in recent years.
Given the high cost of land, developers have been incentivized to build large apartments and homes targeted to the wealthy in order to get the most bang for their buck.
“The market turned around, but the banks aren’t convinced it’s really happening, so developers still don’t have any money,” Eisenberg says. “So, the builders are saying now there’s a real shortage of new lots fast approaching. If you have a limited amount of lots, put yourself in the perspective of a builder, do you build a cheaper house or more expensive house?”
According to Eisenberg, we can start believing in the economic recovery once monthly job growth hits 200,000. Only 75,000 jobs were added in January.
RATES, ENERGY BOOM FUELING DEMAND
There is indeed reason for overall optimism when it comes to the housing market’s future outlook, however. Faith in the recovery from the Great Recession will grow with each sign of economic improvement – a positive jobs report, improved housing numbers, or a disaster-averting congressional agreement.
As more lenders begin to believe, it will be easier for builders to borrow the money they need to buy and develop lots. Consumers will also have more money to spend. These factors, along with interest rates expected to remain near record-lows for the foreseeable future, make it clear that the sweet spot for single-home buying may still lie ahead.
We’re already seeing a number of residential hotspots popping up in areas of the country experiencing a natural-resources renaissance, which indicates what employment improvements in other sectors could mean for single-family housing growth nationwide.
“One other wild card in the housing markets is some of the more remote areas of the country that are currently experiencing a boom in extracted resources,” Carswell says.
“The Bakken reserve in North Dakota comes to mind. House prices are rising there, and the supply cannot keep up with demand, from the last that I heard. As someone that believes in long-term neighborhood stability, this is something to keep an eye on in 2014, especially since we are slowly moving to a self-dependent state of oil consumption.”
Suffice it to say, mortgage professionals have a lot to watch out for in the year ahead.
