What To Expect From The Real Estate Market In 2014

Seven years have passed since the worst housing market crash in United States
history triggered a global financial crisis. Lehman Brothers declared bankruptcy,
and a host of other banks came close to joining them before being rescued in a
series of shotgun mergers and acquisitions, the largest of which included Bank
of America Merrill Lynch, JP Morgan Chase Bear Stearns, and Wells Fargo
Wachovia. Alongside bailouts and a beleaguered stock market, home prices
continued to fall, foreclosure rates increased, and by the end of June 2010, it
was estimated that nearly a quarter of all U.S. homeowners were underwater
a situation when a home is worth less than its outstanding mortgage. In the
years since the crash and financial crisis, the housing market has been making
a slow and bumpy recovery.

The Slow and Tenuous Recovery

During the first quarter of 2012, an unsettling 31.4% of homeowners were
underwater. Since then, however, about 5 million homeowners have been freed
from negative home equity, thanks to rising home prices. Although that still
leaves as many as 10.8 million or 21% of homeowners underwater as we
approach the New Year, the number is expected to continue improving as the
real estate market and broader economy continue to improve as well.

The housing recovery has struggled against disruptions to the broader
economy. As we approach the end of 2013, Frank Nothaft, vice president and
chief economist with Freddie Mac noted, Were likely going to see the housing
recovery slow down, but not shut down, as we close out the rest of this year
due to tight inventories in many markets, rising mortgage rates and slumping
consumer confidence. Looking to 2014, Nothaft said, Fortunately, the housing
recovery should continue to absorb the economic shocks in stride and improve
next year.

In addition, there is expected to be a shift in the coming year from a refinance-
dominated mortgage environment to one driven by purchases for the first
time in over a decade. With the close of 2013 will also come a major transition
in the housing finance industry, said Nothaft. For the first time since 2000,
were going to see the mortgage market dominated by purchase activity as the
refinance share drops below 50%. And with mortgage rates rising, were also
going to see the home-sales gains as well as the impressive house price growth
begin to moderate to more sustainable levels.

In the third quarter of this year, lender-initiated foreclosure action fell to the
lowest level since the second quarter of 2006, according to foreclosure listing
firm RealtyTrac, Inc. About 120,000 homes nationwide were taken back by
lenders during this years third quarter, putting the country on track to end the
year with about 507,000 completed foreclosures down about 24% from 2012
numbers. The number of foreclosures reached a high in 2010 at 1.05 million,
and since then rates have been declining.

As the housing market continues its recovery, we can expect a few things to
happen in 2014:


House prices will continue to rise, but at a slower rate than 2013.
As home prices rise, more homeowners will emerge from being
underwater, putting them in the position to finally buy and sell properties.
Mortgages will be dominated by purchases rather than refinance activity,
for the first time since 2000.
Higher mortgage rates will slow home sales and price gains to more
sustainable levels.
Low inventories will be helped by an increase in new construction and a
decrease in investor purchasing.
Rising Prices in 2013 for Most U.S. Metro Areas

The vast majority of U.S. metro areas tracked by Clear Capital, a real estate
data and analysis provider, have seen rising home prices during the past year.
Nationwide, themedian sales price of existing homes (single-family and condos)
rose 10.9% over the year ending Sept. 30, 2013, boosting the median price for
existing homes to $215,000. Although prices are, on average, still 31.5% below
2006 highs, a few markets have achieved double-digit gains over their 2006
peaks, including Austin/Round Rock, Texas (+12.9% from 2006 highs); Buffalo-
Niagara Falls, N.Y. (+16.1%); Charleston, W.Va. (+16.4%); Ithaca, N.Y.
(+14.4%); Pittsburg, Pa. (+10.0%); State College, Pa. (+13.2%); and
Watertown-Fort Drum, N.Y. (+23.0%).

Low Inventories in Many Markets

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Low inventories explain a lot of the price gains. As we approach the end of
2013, there is a five-month supply of homes nationwide (meaning it would take
five months to sell everything at the current sales pace). In general, a market
that is balanced between sellers and buyers has about a six-month supply.
Much tighter inventories, however, can be seen in certain markets, such as
Washington D.C., which has only a 2.1-month supply going into the end of the
year.

A number of factors can contribute to lean inventories. In some
markets, institutional investors have bought many of the available properties, to
rent, flip or hold until prices rise. In fact, institutional investors (defined here as
those purchasing 10 or more properties in the previous 12 months) accounted
for 10% of all sales in August of this year, but in certain markets, those figures
were much higher. Institutional investors represented 31% of purchase activity
in Memphis, Tenn., 29% in Jacksonville, Fla., 22% in Atlanta, Ga., 17% in St.
Louis, Mo., and 17% in Detroit, Mich.

Low housing starts are another factor. New home construction essentially came
to a halt following the housing crash, remaining at historic lows for nearly five
years due to tight credit, land and labor, and higher costs for materials. April of
this year marked the lowest level of ready-to-occupy new construction on
record, with just 39,000 new homes in the housing inventory. According to
census data, however, the inventory of newly built homes (including homes that
are currently under construction and those that are ready-to-occupy) is rising as
demand increases. After hitting a low in July 2012, the total inventory is up
nearly 10% and is expected to continue rising in 2014.

Low inventories are also the result of homeowners who, having bought at the
peak, are reluctant to sell while prices are still rising. Homeowners who have
been underwater (or close to it) are finally seeing the light at the end of the
tunnel and know that the longer they hold on, the more likely they are to
recoup their investments.

Look for Smaller, More Sustainable Gains in 2014

In the years leading up to the crash, home values nationwide, on average, had
risen about 50% from the first quarter of 2000 to the first quarter of 2005.
Certain markets, however, experienced price growth that was significantly
higher than the national average. Prices in New York City, Miami and San Diego,
for example, jumped 77%, 96% and 118%, respectively. In order to buy
houses at these higher prices, of course, Americans had taken on more
mortgage debt, and from 2000 to 2007, the value of gross residential
mortgages in the U.S. had increased nearly $5 trillion more than household
incomes. While price gains are generally a good thing, such increases are not
sustainable, especially when average incomes are stagnant or rising only a
small percentage.

Although the current market has enjoyed price increases, gains are expected to
taper off as we enter 2014. Alex Villacorta, Ph.D., Vice President of Research &
Analytics for Clear Capital, shared some observations in advance of the firms
2013 year-end review of home price trends and 2014 forecast, due to release
Jan. 6, 2014. Regarding 2013 performance, Villacorta said, "2012-2013 was a
good year for national home prices, with 2013 prices likely to end the year
seeing a full 10% gain in values. This strong growth is double the rate of
historical national price growth, and only eclipsed by the run-up years of 2005-
2006 when end of year price gains reached 11.7% and 13%, respectively.

Villacorta expects home prices in 2014 to fall back in line with historical norms.
National home prices have recovered from the over-correction attributed to the
overall economic recession, Villacorta said. With prices back in line and the
broader economy not yet showing sustained strength, we expect 2014 national
home prices to revert to historical rates of growth of 4 to 5%.

Its important to acknowledge that certain markets will fall outside either
above or below these projections. Despite the projected moderation to
historical norms, there still remain many major metros that are either
outperforming or severely underperforming the national norms, Villacorta said.
In addition, he cautions, Granular analysis of market performance remains a
key lesson to avoid misleading assumptions for all market participants."

The Bottom Line

The housing market has been making a slow and steady recovery since the
crash that led to rapidly declining home prices, and record numbers of
foreclosures and underwater mortgages. The recovery will continue to be driven
by a combination of elements including home inventories (supply), foreclosure
rates, mortgage rates, availability of credit, institutional investing and factors
within the broader economy.
Real Estate in 2014: A Need-to-Know Guide
Real Estate in 2014: A Need-to-Know Guide

The Fiscal Times
January 3, 2014
After year of struggles, the housing market roared back to life in 2013. The rebound will
continue in 2014, but the pace will slow.
Experts say 2014 will be a year of continued growth and stabilization in the housing
market with rising home prices, fewer foreclosures and greater activity among
underwater homeowners. But this years market faces strong headwinds as inventory
remains tight and both homebuyers and builders face tough lending standards.
To buy a home in todays market, you either need impeccable credit or the ability to
make an all-cash purchase. The average FICO credit score on conventional loans used
to purchase homes in November 2013 was 756, according to the most recent data from
Ellie Mae, a company that produces mortgage underwriting software. The average score
for denied applications was 729.
"To put that in perspective, the normal average acceptance score historically is around
720," says Walter Molony, a spokesman for the National Association of Realtors (NAR).
"Right now, the average rejection score is now what the acceptance score was
historically."
Dont expect credit standards to ease up any time soon. This month, new Dodd-Frank
regulations aimed at preventing risky borrowers and equally risky mortgage products
from entering the market take effect. The new changes require lenders to closely
evaluate such factors as a borrower's debt-to-income ratio, employment status,
income, assets and credit history before underwriting a loan.
Home Prices Continue to Climb
In addition to tight credit, rising interest rates and home prices may discourage buyers
from purchasing in 2014, says Jed Kolko, chief economist for Trulia.com, the real estate
site. Average 30-year mortgage rates bounced from 3.34 percent last January to their
current 4.48 percent rate, with many expecting further increases of up to a full
percentage point in the New Year. Home prices nationwide have risen 11.2 percent on
average over the past year, according to the S&P/Case-Shiller home price index.
Sunbelt cities in places like California and Arizona have seen home values surge in
excess of 20 percent.
Related: 5 Reasons the Luxury Real Estate Market Is Booming
While it remains a sellers market, price gains arent all bad news for buyers. First-
timers may be discouraged, but increasing prices are music to the ears of current
owners, many of whom are watching their formerly underwater homes gain value. More
than 85 percent of homeowners with a mortgage in the second quarter have some
equity in their home, up from less than 75 percent in the fourth quarter of
2011, according to CoreLogic.
"We saw a period where the first-time buyer was sort of a driving force," says Robert
Denk, senior economist for the National Association of Home Builders. "We expect that
to reverse.... As house prices rise, as fewer mortgages are under water, that should
bring the more established [buyers], the trade-up market, back to some degree."
How much the housing market bounces back in 2014 also depends on construction
activity. With builders still fiscally cautious and facing the same tight lending
environment as buyers, expect a small increase in the number of new homes on the
market. As buyer demand picks up, the pace of new home construction should follow.
"The [housing] bust was basically a five-year period where we produced and sold a
fraction of the homes we would see in that normal market," Denk says. "Were going to
see a lot of that pent-up demand turn into realized demand. That will be an important
driving force in 2014 and 2015."
Inventory Remains Tight
Still, the gains in demand (and the inventory that follows) will be slow. While total
housing inventory declined in both October and November, unsold inventory is
currently five percent higher than it was a year ago, according to NAR. The association
predicts inventory won't radically accelerate until 2015.
Related: Real Estate Red Alert: The Flippers Are Back
"I think 2014 will be the year when we see that home price appreciation pulls back to
more normal, sustainable levels," says Daren Blomquist, vice-president of
RealtyTrac.com, a site that aggregates real estate data. Markets that boomed in 2013
will likely scale back to more modest growth in the low double digits, while nationwide
growth should average about 4.5 percent, according to Blomquist.
Even with recent gains factored in, most markets are not at risk right now for another
housing bubble. Nationally, home prices remained 4 percent undervalued in the third
quarter, according to Trulias Bubble Watch. Only Orange County, Calif., and Los
Angeles are more than 10 percent overvalued, the report finds.
The hottest markets for 2014 wont be in the big cities. A joint study of more than
1,000 real estate industry experts done by PwC and the Urban Land Institute ranks real
estate prospects in smaller secondary markets including Houston, San Jose, Dallas/Fort
Worth and Austin above those in larger cities like Chicago, Atlanta and Washington,
D.C., where there's a lot of money chasing a few assets, says R. Byron Carlock, Jr.,
PwC national real estate practice leader.
Its still 35 percent cheaper nationally to buy a home than to rent one, but that doesnt
mean millennials are rushing out to get a mortgage. Just 18 percent of
consumerssurveyed in September by Credit.com said that buying a house was still their
definition of the American Dream.
Is the housing market making a major shift?

STORY HIGHLIGHTS
Interest rates low, but rise in home prices is affecting home affordability
In the third quarter, 72% of agents surveyed said now is a good time to sell a home
Down from 86% in the previous quarter
The real estate market has been one of the strongest pillars of the economy following the greatest
financial downturn since the Great Depression. Amid low interest rates and a great deal of intervention
from policymakers, home buyers received an added incentive to purchase a home. Meanwhile, sellers
enjoyed low inventory levels and rising prices. However, a new survey finds that sellers might be losing
their control on the market.
In the third quarter, 72% of real estate agents said now is a good time to sell a home, down from 86% in
the previous quarter, and the first drop of the year, according to Redfin, an online estate brokerage. On
the other side of the closing table, 55% of agents said now is a good time to buy, up from 46% at the
beginning of the year. Thirty percent of agents also said that sellers are having difficulties getting their
home to appraise for the contract purchase amount.
"At the end of this summer, you could smell the rubber on the road from buyers hitting the brakes," said
Redfin San Diego agent Sara Fischer. "The cutthroat competition and frenzied demand has relaxed
considerably."
Although interest rates are still low on a historical basis, the recent rise in home prices is affecting home
affordability. In the second quarter, 69.3% of new and existing homes sold were affordable to families
earning the U.S. median income of $64,400, according to the National Association of Home Builders.
That is down from 73.7% in the first quarter and is the first reading below 70% since late 2008.
In August, home prices across the nation increased on a year-over-year basis for the 18th consecutive
month. According to CoreLogic, a property information and analytics provider, home prices jumped
12.4% in August from a year earlier. In fact, home prices have logged double-digit gains for seven
straight months. Home prices are still 17.1% below their bubble peak in April 2006, but every state
posted an annual increase in August.
Going forward, the survey from Redfin finds that only 5% of agents believe home prices will rise a lot in
the next 12 months, down from 44% at the beginning of the year. Meanwhile, 11% of agents believe
prices will drop a little over the next year, compared to only 4% in the second quarter.
Wells Fargo edges back into subprime as US mortgage
market thaws

Wells Fargo, the largest U.S. mortgage lender, is tiptoeing back into subprime home loans
again.
The bank is looking for opportunities to stem its revenue decline as overall mortgage
lending volume plunges. It believes it has worked through enough of its crisis-era
mortgage problems, particularly with U.S. home loan agencies, to be comfortable
extending credit to some borrowers with higher credit risks.
The small steps from Wells Fargo could amount to a big change for the mortgage
market. After the subprime mortgage bust brought the banking system to the brink of
collapse in the financial crisis, banks have shied away from making home loans to
anyone but the safest of consumers.

A pedestrian walks by a Wells Fargo home mortgage office in San Francisco.
Any loosening of credit standards could boost housing demand from borrowers who
have been forced to sit out the recovery in home prices in the past couple of years, but
could also stoke fears that U.S. lenders will make the same mistakes that had triggered
the crisis.
(Read more: This part of Wells Fargo's business is taking off)
So far few other big banks seem poised to follow Wells Fargo's lead, but some smaller
companies outside the banking system, such as Citadel Servicing Corp, are already
ramping up their subprime lending. To avoid the taint associated with the word
"subprime," lenders are calling their loans "another chance mortgages" or "alternative
mortgage programs."
And lenders say they are much stricter about the loans than before the crisis, when
lending standards were so lax that many borrowers did not have to provide any proof of
income. Borrowers must often make high down payments and provide detailed
information about income, work histories and bill payments.
Wells Fargo in recent weeks started targeting customers that can meet strict criteria,
including demonstrating their ability to repay the loan and having a documented and
reasonable explanation for why their credit scores are subprime.
It is looking at customers with credit scores as low as 600. Its prior limit was 640, which
is often seen as the cutoff point between prime and subprime borrowers. U.S. credit
scores range from 300 to 850.
Lenders remain cautious in part because of financial reform rules. Under the 2010
Dodd-Frank law, mortgage borrowers must meet eight strict criteria including earning
enough income and having relatively low debt. If the borrower does not meet those
hurdles and later defaults on a mortgage, he or she can sue the lender and argue the
loan should never have been made in the first place.
Those kinds of rules have helped build a wall between prime and subprime borrowers.
Lenders have been courting consumers who are legally easier to serve, and avoiding
those with weaker credit scores and other problems. Subprime borrowers accounted for
0.3 percent of new home loans in October 2013, compared with an average of 29
percent for the 12 months ended February 2004, according to Mark Fleming, the chief
economist of CoreLogic.
With Wells Fargo looking at loans to borrowers with weaker credit, "we believe the wall
has begun to come down," wrote Paul Miller, a bank analyst at FBR Capital Markets, in
a research note.
Lenders have an ample incentive to try reaching further down the credit spectrum now.
Rising mortgage rates since the middle of last year are expected to reduce total U.S.
mortgage lending in 2014 by 36 percent to $1.12 trillion, the Mortgage Bankers
Association forecasts, due to a big drop in refinancings.
(Watch: Wells Fargo CFO:In midst of good housing recovery)
Some subprime lending can help banks, but it may also help the economy. In
September 2012, then Federal Reserve Chairman Ben Bernanke said housing had
been the missing piston in the U.S. recovery.
A recent report from think tank the Urban Institute and Moody's Analytics argued that a
full recovery in the housing market "will only happen if there is stronger demand from
first-time homebuyers. And we will not see the demand needed among this group if
access to mortgage credit remains as tight as it is today."
Subprime mortgages were at the center of the financial crisis, but many lenders believe
that done with proper controls, the risks can be managed and the business can
generate big profits.
Making up with the agencies
For Wells Fargo, one of the critical factors in the new strategy was its clearing up of
disputes with Fannie Mae and Freddie Mac, said Franklin Codel, Wells Fargo's head of
mortgage production in Des Moines, Iowa. The 2013 settlements for $1.3 billion
resolved a few battles in a half-decade war between banks and government mortgage
agencies over who was responsible for losses from the mortgage crisis.
The bank still has mortgage problems to clear up with the agencies, including a lawsuit
linked to the Federal Housing Administration, but Wells Fargo officials believe the worst
is over.
Wells Fargo avoided many of the worst loans of the subprime era: It did not offer option
adjustable-rate mortgages, for instance. But when it acquired Wachovia in 2008, the
bank inherited a $120 billion portfolio of "Pick-A-Pay" mortgages where borrowers could
defer payments on their loans. Those loans have suffered big losses.
One of the reasons for banks being so cautious in mortgage lending now is that Freddie
Mac, Fannie Mae and the FHA have been pressing lenders to buy back home loans that
went bad after the crisis. The agencies guaranteed the loans, and argued that the banks
overstated the mortgages' quality, or made mistakes like omitting required documents.
Banks feel that the agencies were using trivial mistakes as a club to pressure banks to
buy back loans. But after its settlements, Wells Fargo is more confident about the
underwriting flaws the agencies consider material and the quality of the documentation
needed to avoid such costly battles.
"As things become clearer and we are more comfortable with our own processes and
controls, it gets easier" to extend more credit, Codel said.
Still, Wells Fargo isn't just opening up the spigots. The bank is looking to lend to
borrowers with weaker credit, but only if those mortgages can be guaranteed by the
FHA, Codel said. Because the loans are backed by the government, Wells Fargo can
package them into bonds and sell them to investors. The funding of the loans is a key
difference between Wells Fargo and other lenders: the big bank is packaging them into
bonds and selling them to investors, but many of the smaller, nonbank lenders are
making mortgages known as "nonqualified loans" that they are often holding on their
books.
Citadel Servicing Corp, the country's biggest subprime lender, is trying to change that. It
plans to package the loans it has made into bonds and sell them to investors.
Citadel has lent money to people with credit scores as low as 490 - though they have to
pay interest rates above 10 percent, far above the roughly 4.3 percent that prime
borrowers pay now.
A trailer in the park
As conditions ease, borrowers are taking notice. Gary Goldberg, a 63-year-old
automotive detailer, was denied loans to buy a house near Rancho Cucamonga,
California. Last summer he was forced to move into a trailer park in Las Vegas.
Going from 2,000 square feet to 200 - along with his wife and two German shepherd
dogs - was tough. He longed to buy a house. But a post-crash bankruptcy of his
detailing business had torched his credit, taking his score from the 800s to the 500s.
"There was no way I was going to get a mortgage," said Goldberg. "No bank would
touch me."
(Read more: Wells Fargo bans staff from investing in P2P loans)
But in December, he moved into a 1,000-square-foot one-story home that he paid
$205,000 for. His lender, Premiere Mortgage Lending, did not care about his bankruptcy
or his subprime credit score. That is because Goldberg had a 30 percent down payment
and was willing to pay an 8.9 percent interest rate.
To be sure, credit is still only trickling down to subprime borrowers. Jamie Dimon, chief
executive of the second-largest U.S. mortgage lenderJPMorgan Chase & Co, said on a
conference call last month that he did not envision a "dramatic expansion" of mortgage
credit because of a continued lack of clarity from the government agencies on their
repurchase demands.
But smaller, non-bank lenders are making more loans. One such company, ACC
Mortgage in Maryland, is offering a "Low Credit Score Debt Consolidation Program" as
well as a "Second Chance Purchase Program." Low credit scores don't matter. Neither
do bankruptcies, foreclosures or short sales.
"I think that is going to be the wave of the future, basically making non-prime
mortgages, carving that out into a profitable niche," said Guy Cecala, publisher of
newsletter Inside Mortgage Finance.
"Right now we're at the infant stage."