If you purchased a home with a mortgage, you’re already keenly aware of one of the perverse aspects of borrowing money to buy a house — and that is if the price of real estate in your area goes down, that takes a bite right out of the equity of your home. Yet no matter how much value your home loses, the bank still expects the same check from you every month. It’s a great deal, just not for you.
The problem with speculating on an industry the size of the housing market is that the view may be quite different from your living room window. The broad trends and currents that move the housing industry have to be tempered by the knowledge that all real estate is local, and each market has its own definition of normal. That said, there are some definite trends in the US housing market that will shape the rest of 2014.
Young People Staying Home
First-time homebuyers are basically absent from the market, and that trend is unlikely to improve in any significant manner for the rest of this year, despite firming numbers in unemployment. Young people, saddled with tens of thousands in student loan debt, are choosing to stay with their parents longer and putting off getting married. The financial situation of millions of young people is then further complicated by strict new income requirements for mortgages. The result has been to cut first-time buyers from roughly a third of the market, down to just 16%.
Buyers Take a Pass on Higher Interest Rates
The Mortgage Bankers Association reported last week that mortgage applications dropped 9.2% on a seasonally adjusted basis. Mortgage rates are still insanely low by historical standards, averaging right around 4.36% for conforming loans and 4.07% for FHA loans. Yet a lack of available homes, and high real estate prices, mean even minor increases in interest rates are enough to send mortgage and mortgage refinance applications skittering. This winter, the real estate industry blamed the harsh weather for sluggish sales in the housing market — but spring came and no one showed up for the open house.
Coupled with higher interest rates has been a surge in the number of buyers paying cash for a home. With nearly 43% of home purchases becoming all cash —and over 60% in markets like Florida — it’s quite possible some people who thought about buying a home found it difficult to compete against buyers paying cash, and just gave up.
Current High Prices Will Modulate
It’s unlikely interest rates will be going back down. The Fed has maintained a steady course of backing away from further stimulus, and has provided plenty of notice that interest rates will be on the rise. Even with available inventory in many markets at historic lows, upward prices can’t be sustained if there are no buyers. Typically, home prices cycle slightly higher in the spring and summer anyway and, after having homes sit on the market all summer, we could see prices correct much lower in the fall. Having a housing market flooded with cash buyers is a mixed blessing; if they don’t like the price, they’ll take their cash somewhere else, or simply wait out high prices.
The housing market is subject to elasticity of demand just like any other product. As home prices increase, buyers are going to expect a better deal. If they don’t get it, they simply rent for another year or take their cash somewhere they’ll get a better deal.