Housing Market Recovery Hits a Wall
Last year, the U.S. housing market seemed to be making a swift recovery, climbing out of the depths it had sunk to during the Great Recession. Home prices jumped by double-digit percentages, interest rates were at rock-bottom levels for much of the year, many homeowners regained enough equity to be able to sell and bidding wars abounded in the spring and summer among buyers for desirable properties.
Yet here we are almost half way through 2014 and not much progress has been made in the housing market. In fact sales of existing homes have declined in three of the first four months of the year. Total mortgage originations are down from last year's pace as well. What is holding back buyers and sellers?
The demand for home-buying seems to have returned to a good degree, but potential buyers are finding they have a very limited selection in some parts of the country, especially the West. For starters, the number of foreclosures and short sales on the market has dropped off significantly in the past year. And mortgage delinquency rates have made a steady decline recently, indicating that there will be still fewer distressed properties coming on the market.
Also, negative equity is continuing to hold many homeowners back from becoming sellers. The latest figures put at least one in ten mortgage borrowers as being underwater - owing more on the loan than the home is worth - but there are many more out there with only a silver of equity, leaving them unable to sell with any meaningful profit.
And of course, there is a serious shortage of new homes being built. In April there were just 649,000 single-family new housing starts, according to the U.S. Census Bureau, providing very few alternatives to existing-home inventory for buyers.
The result of so little supply bumping up against healthy demand is rising home prices higher, making home-buying less attractive for some would-be buyers. The most recent S&P/Case-Shiller index of the largest 20 U.S. cities reported that home prices were up 12.4 percent in March from the previous year. And interest rates have risen a full point since the spring of 2013. While rates have stayed lower than most economists had forecasted for this year, today's rates don't seem to be much of a determining factor in demand for homes. That is mostly due to the strict lending standards that have been in place since the housing crisis began. It remains difficult for people with less-than-perfect credit to qualify for mortgages.
So how will these factors play out for the housing market during the rest of 2014? The good news is that rates are fairly likely to remain low, keeping affordability higher. If new home construction can be ramped up and prices can continue to rise at a moderate pace, housing supply may finally catch up to demand. Of course the stability of the jobs market and the overall performance of the economy will play a factor in the growth of sales, the biggest issue will be building up a large enough supply once again.