About three years ago, when many analysts were forecasting continued gloom and doom in the housing market, the real estate analysis firm Metrostudy told Bottom Line/Personal readers that home prices would soon begin to rebound—and they did.
While most real estate analysts work from published statistics, Metrostudy pays hundreds of inspectors to visit subdivisions in key real estate markets across the country and report back about what they see. Back in 2011, those inspectors reported that new-home construction had fallen even further than was generally realized…and Metrostudy correctly saw this as a prelude to rising prices for the homes that did go on the market.
What are Metrostudy’s inspectors and analysts seeing now? We went back to the company to ask what it expects for the real estate market in the months and years ahead. Metrostudy chief economist Brad Hunter told us why the firm still is optimistic and what it means for our readers…
DEMAND AND PRICES RISE
- Home prices will appreciate by around 6% in 2014. That’s well below the double-digit growth of 2013 but still a solid gain. Last year’s sharp gains in median sales price—around 11.5%—were driven largely by buyers snapping up remaining real estate bargains, but those bargains now are mostly gone.
- Construction of new houses will jump. The number of home starts could leap by 20% this year, expanding the supply for sale and creating new jobs in construction that will in turn reduce unemployment and help the economy continue its positive momentum. This jump in home starts will not lead to overbuilding or a housing glut. While a 20% increase in home starts is very significant—particularly on top of last year’s 18% rise—new-home construction had fallen to such a low level after the real estate bubble burst that this construction can be easily absorbed by the market.
- Demand for homes will increase as “household formation” slowly rebounds. In a normal year, more than a million new households are formed in the US as many young adults head out on their own. That figure fell to less than 400,000 in recent years as young adults continued to live with their parents or shared living quarters with roommates rather than renting or buying on their own. By some estimates, more than two million households are now “missing.”
- Interest rates will remain below 5.5% in 2014. Fixed rates on 30-year mortgages might inch past 5.5% in 2015—but even that won’t be enough to throw the brakes on the slow-but-steady housing recovery. History suggests that interest rates would need to be close to or above 6% to cause a significant percentage of buyers to seriously consider delaying a housing purchase. Mortgage rates in the neighborhood of 5% might seem high, but that’s just because of the exceptionally low rates we have had in recent years. Mortgages actually still are very affordable.
- This will be a good year to buy a home but a poor one to invest in real estate. Home prices should climb in the years ahead, but not by enough to make homes a smart investment compared with stocks—especially when real estate taxes, insurance and upkeep costs are factored in.
- Regions where new construction is constrained are most likely to see above-average home-price appreciation. On a national level, the rebound in new-home starts will help prevent home prices from increasing rapidly in 2014 and beyond. But in certain parts of the country, new construction is increasingly difficult to achieve on a large scale because of tight zoning laws and/or a lack of buildable lots. In these areas, the demand for homes could outstrip the supply as household formation rebounds, leading to above-average price increases.
- Many small-to-midsize cities will see lots of new homes built in the first half of 2014. Land prices already have rebounded very strongly in most of the major markets—even in places where real estate values plummeted when the real estate bubble burst, such as Phoenix, Atlanta and Las Vegas. But as of early 2014, many builders still are finding affordable land in and around smaller cities.
We appear to be headed back to normal real estate markets, and in normal markets, home prices tend to increase by perhaps 4% to 5% per year (potentially more in times of steep inflation). This year might be a hair higher because we’re still at the tail end of the rebound. Of course, these predictions are averages—some areas will do better, some worse.
What to do: The current market does not strongly favor buyers or sellers, so there’s no need to rush to buy or sell…or to avoid doing so. Homes are once again something we live in, not a speculative or risky investment.
And while the economy and employment now are improving, new-household formation continues to lag. That has led some to speculate that combined households and low rates of formation of new households could be the new normal.
But history tells us that young adults will indeed start buying or renting their own homes and apartments as soon as they are economically able to do so. The constraining factor is that it is much tougher to get a mortgage now than it was before 2008, particularly for young adults.
Substantial down payments and solid credit scores now are required to get a mortgage. But these mortgage hurdles should only slow new-home formation, not stop it. Human nature hasn’t changed—people still want their own homes.
As the economy and the job market continue to slowly improve, an ever-increasing percentage of would-be home buyers will save up the down payments and achieve the kinds of credit scores that are required.
The other major factor that was holding back demand for homes across the US between 2008 and 2012—a lack of faith in the future of home values—seems to be almost completely behind us.
Interest rates have remained low in part because of Federal Reserve policy and in part because of relatively low demand for borrowed money among corporations and other potential borrowers. Neither of those factors appears likely to change dramatically in the next year or two.
America’s massive public debt could drive interest rates significantly higher in the longer term, but there really is no reason to believe that this will become a major factor within the next few years.
What to do: Avoid an adjustable-rate mortgage unless you are certain that you will sell the home before the loan’s rate changes. Rates are likely to go up from current levels, not down, and could increase significantly over the life of a 30-year mortgage.
What to do: Go ahead and buy a home for your own use—but don’t rush out to buy an investment property, and don’t let yourself get talked into buying a bigger home than you need just because you’re told it’s “an investment.”
Where to Buy
What to do: If you expect to move to an area such as the southeast coast of Florida or San Francisco—both popular retirement destinations—consider buying a home and moving there sooner rather than later.
The former is hemmed in by the ocean and the Everglades, and the latter has tough zoning laws, limited remaining open land and a thriving technology industry whose employees are eager to buy homes, suggesting that home values might rise at above-average rates in the years ahead.
If you currently live in an area such as Houston, South Las Vegas or the outer suburbs of Chicago or Atlanta and expect to sell your home at some point, consider selling sooner rather than later—these areas have relatively relaxed zoning laws and an abundance of buildable lots, suggesting that home-value appreciation could lag national levels.
What to do: Significant numbers of relatively affordable homes could be coming onto the market in many smaller cities in mid-to-late 2014, which could make that a good time to buy but potentially add substantial competition for sellers.
Examples: Nashville and Charlotte both saw massive increases in new-home starts in late 2013, pointing to dramatic increases in the supply of homes on the market this year.