The Illinois housing picture grew brighter in 2013 as home prices and sales steadily improved, distressed properties worked their way through the system and a sustain real estate market rebound seemed to be underway. Will these trends continue as we head into 2014? These trends and economic factors could shape the market in the new year.
Will The Housing Market Continue its Recovery in 2014?
We believe strongly that the market will continue to recover nicely through 2014. All signs are pointing to a more normal market with a nice equilibrium between supply and demand. The main concerns are the continuing problems in Washington over the budget and the debt ceiling and the lack of consensus in Springfield over the resolution of the budget deficits in the immediate term and the debate over solutions to the accumulated pension funding problems. Even with modest employment recovery, the housing market seems to be responding; more robust employment growth will generate positive signals for the housing market and if the housing market continues to recover then there will be further stimulus to employment growth especially generated from new construction. After the roller coaster ride that real estate has endured over the past 10 years, a couple of years of peace and quiet would be very welcome. The fundamentals of the market are mixed, but on balance appear to be good. While we may not be happy with the rate of economic growth or the state of the labor market, gross domestic product (GDP) is moving forward and net job growth has been consistently positive. Both of these are necessary for the real estate market grow.
What trends are expected in terms of sales and prices?
Sales will be up 5%-10%. Regarding prices, on a national basis, we agree with the experts consulted in the Home Price Expectation Survey who are looking for prices to increase an additional 4%-5%. Continued increases although the rates (year over year) will probably not be as dramatic as this year as the base (2013) will have been higher. Price recovery will probably be slower, weighed down by the continued presence of foreclosures. However, by the end of 2014, foreclosures will be returning to levels experienced in the pre-bubble era. In the market itself, sales have been up year over year just about every month in 2013, and prices (values, not market snapshots) according to the S&P/Case-Shiller Home Price Indices are up strongly in all the metropolitan markets they measure. Interest rates remain calm and household formation rates have begun to rebound from the great recession. Even housing starts are up.
Mortgage Rates Have Been Inching Higher- Is this expected to continue and what impact could it have on sellers and buyer demand?
30-year mortgage interest rates to be trading at a range between 5.5%-6% by the end of 2014. Both Freddie Mac and Fannie Mae recently reported that they believe the housing market would not be adversely impacted until rates were in the 6.5%-7% range. A recent survey by Pulsenomics revealed that the majority of market experts believe that the market would be unchanged for the most part until rates moved past 6%. This will certainly dampen demand at the margin; however, the costs of home ownership are still attractive vis-a-vis renting and if price appreciation continues, then there will still be an incentive for new buyers to enter the market. If rates reach 5%-6% percent and inflation continues around 2%-3%, the real costs of borrowing is still very low. There will be some issues in 2014 that will bring uncertainty to the real estate market. Even though at press time it appears that Janet Yellen will succeed Ben Bernanke at the Federal Reserve, thus ensuring continuity of policy, the long-term monetary stimulus will be coming to a halt in 2015. This means that rates will be up during 2014 as markets attempt to anticipate the Fed’s new policy stance. More troubling, however, is the continued weakness of consumer confidence. There are a number of reasons for this, most prominently the stalemate in Washington, but confidence must rise if consumers are willing to commit to the purchase of homes. Finally we continue to see restriction of access to home financing. That has been a major wet blanket for the housing recovery.
Well distressed properties continue to be a factor in next year’s housing market?
For the vast majority of the country, the negative impact of distressed properties is behind us. In the northeast, where foreclosure timelines have been measured in years not months, and months’ supply of inventory still stands at over seven months, we will continue to feel the effects of both short sales and foreclosures through 2014. However, the overall shortage of housing inventory in Illinois (under six months’ supply) and Chicago (less than four months) will allow distressed inventories to be absorbed rather rapidly. The influence of distressed properties will continue to diminish; over the last year, new additions to the foreclosure inventory have been smaller than the sales of foreclosed properties but in certain communities and neighborhoods, the auctions of foreclosed properties have a dampening effect on prices of between one to two percent.
What economic trends or other market factors could affect housing in 2014?
The economic factors that impact housing (employment, consumer confidence, etc.) will continue to improve. As far as market trends are concerned, we see three major areas that will show sizeable growth moving forward:
- Baby Boomers will take advantage of the window of opportunity and secure a sub-five percent mortgage rate and move-up to the home of their dreams.
- As the job market improves, Millenials will become a force as first-time homebuyers.
- Every piece of demographic data points to a surge in homeownership amongst Hispanics.
Internationally, continuing uncertainty in Europe and the Middle East, the impasse in Washington over budget and debt issues and the avoidance behavior of the state legislature with respect to fiscal issues could cloud the recovery of the economy. Job growth is still below levels needed to ensure a sustainable recovery. However, there are signs of new housing construction and these initiatives together with enhanced sales will continue to generate positive impacts on the economy that in turn will feedback positive signals to the housing market. With all the positives and negatives accounted for, 2014 should be a continuations of 2013. The economy will grow at a modest rate (about 2/5% after inflation) and the labor market will also be up (about 1.8 million net new jobs). Home sales should be about 10% higher in 2014 over 2013, and prices should be up significantly.