2014 Housing Predictions

2014 Housing Prediction

          A tale of 2 halves with lingering questions, characterizes what we can say was the story for housing for 2013. In the first half of the year, rates were low as the 10 year note was well under 2%.  People were still refinancing, as home prices rocketed.  Multiple bids were common and pundits like Ivy Zelman cheered the improving market with praise like “Housing is in  Nirvana”.

Get out the pom poms?  Eh, no.  The higher home prices and multiple bid sales were more of a reflection of the low inventory rather than an improving market let by a natural level of mortgage buyers. A massive spike in the 10 year note from 1.60% to 3% gave the housing bulls a great dose of reality -- the reality of an economic cycle where the majority of jobs gains  have been going to low wage paying service jobs that are unable to support a housing boom.

These “two faces” of 2013 are what will frame the housing market in the coming year.

Predictions for 2014

1.            Seasonally adjusted annual rate of sales (SAARS) will be slightly higher than 2013, with downside risk. Last year I predicted a conservative 5.10 million sales—but even that conservative number now appears overly optimistic.   November gave us a miserly 4.90 million for the year with no chance of catching up to the 5.1 million by the end of December.  For 2014, I predict there will be between 5.25 to 5.45 million sales if (and only if) two market conditions are met. First, cash buyers will need to continue to make up 30% of the market. Housing inflation since April 2012 has locked out many would-be mortgage buyers which means we still don't have enough home buyers qualified for mortgage purchases.  The second condition is that mortgage rates can't go anywhere near 5.75% by the selling season.  In 2013, the rise in rates from  3.50%-4.5% was quickly followed by  the utter destruction  in the number of  mortgage purchase applications, Mortgage purchase applications were up 14% year over year and then took a dramatic fall down -11% on the 4 week moving average following the rate rise. So, for 5.25-5.45 million to be in play we will need 30% of the market to be cash buyers and  mortgage interest rates too stay low.

2.            As much as I hate to say this, in 2014 home prices will continue to rise.  I predicted 2-5% rise in home prices for 2013, but the market, driven by very low inventory, rose between 5-12% depending on whose metrics one uses (Zillow, Corelogic, Case Schiller and others).  Inventory will improve in 2014 -- I believe we can get to 6 months on sale inventory for the nation—but that still won't be enough to prevent home prices from rising. I predict a 2-5% increase in home prices.  In certain regions, like California we need to watch out for a full-fledged bubble forming. Certain buyer and inventory metrics can lead to another double digit gain in home prices, which would be very harmful to the housing market. If we get a buyer profile of   34-39% of homes in the U.S. are bought with cash and inventory stays under 6 months then we could get a repeat of the harmful housing inflation of 2013. However, the likelihood of that is minimal.

3.            Housing starts will also rise in 2014, but not as fast as some people will hope.  In 2013 I predicted starts would be positive year over year from 2012 which wasn’t much of a stretch considering that we had come off the worst 4 year construction period since 1959.  However, the velocity upward didn't warrant great praise. Builders are not out of the doldrums yet.  Housing price inflation means more traditional sellers will be coming to the market the next few years creating more competition for new home builders.   I wouldn't be surprise to see builders slash prices to compete with traditional homes. However, starts, permits and new home sales will rise in 2014 because we are still recovering from a low base.

4.            Lending standards won't ease and in fact will be slightly tighter in 2014. In 2013 my favorite ridiculous explanation given by housing pundits for easing standards was   “because the refinance business is dead, lenders will ease standards to promote home buying”.  But since these lenders are beholden to the rules of the CFPB, qualified mortgage (QM) in order to conduct business, that kind of talk is nonsense. Not every loan will be made under the umbrella of QM but many will. The truth is lending standards aren't tight. For a deeper dive into this topic check out one of my previous interviews on Bloomberg with Kathleen Hays and Vonnie Quinn (http://loganmohtashami.com/2013/03/27/will-be-on-bloomberg-financial-talking-about-bernankes-myth-on-tight-lending-standards-the-real-housing-story/ ). 2014 will be tough on the marginal, high-debt-to-income buyer, forcing some to buy smaller homes reversing or at least slowing the home size inflation that has characterized the last decade. In regard to mortgage rates, I expect a range of 4.375% -5.375%. As QE winds down the odds of getting a massive spike in the 10 year is less likely. The 2 reasons that would delay the end of QE would be a lower trend on consumer price index (CPI) and the jobs opening labor turnover survey (JOLTS) number gets soft , 2  economic indicators that Fed Chair women Janet Yellen looks at. 

5.            The shift towards renting instead of buying will continue in 2014.  Millions of Americans will rent because they can't qualify for a home mortgage and the days of staying in a delinquent home have pretty much come to an end. At the end of 2013 we had nearly 3 million loans in delinquency. Many these will go the way of foreclosure or a short sale and these would-be owners will become renters.  The younger, would-be first time home buyers will face both housing price inflation and the massive amount of student loan debt on the books. While all other household debt can be deleveraged through foreclosures and bankruptcies, there is no escape from student loan debt – and this will eventually exact its toll on the housing market by limiting the number of qualified buyers.

For  2014 the main metric to watch will be ratio of mortgage to cash buyers. In a normal healthy market mortgage buyers make up 85%-92% of the market and cash buyers 7-12%. In the last years this ratio has been skewed strongly to the cash buyer with roughly 67-70% mortgage buyers and 30-33% cash buyers. The cash buyers have been a saving grace to the housing market as a whole but this can’t go on forever. Cash buyers are typically bargain shoppers and with the rising housing prices, real estate becomes a less attractive option even as a yield return asset.   We should expect a rise in gross domestic product of around 2.4% with a upside surprise bias and job creation to be  175-200K monthly.  While these job numbers sound relatively robust, keep in mind that the majority of the jobs recovered have been low wage paying service sector jobs which typically are unable to support the debt to income and debt to liability ratios required for a home mortgage. Jobs itself won't be as helpful in this housing cycle, we need better paying jobs and income growth for those working.  If we don't get profit to wage growth by 2015, America will experience a housing inflation problem that not even the most powerful form of quantitative easing can solve.