How would you describe the housing market of 2013,
especially in the San Francisco Bay Area? It was like strapping yourself into a
rocket-assisted vehicle, firing up the afterburners and having the extreme
acceleration try to push you through the rear of the seat all the while
stretching your face around to the back of your head. An extreme shortage of
inventory coupled with record low interest rates and a pent up pool of
ready-and-eager buyers launched the market out of the gate and into the
stratosphere, resulting in higher than anticipated market gains. Although the
frenetic pace began to slow late in the year, there was still significant
activity in many of the most desirable neighborhoods.
Understandably, 2014 has been approached with
a great deal of nervous anticipation.
After extensive market research, one key word seems to
be emerging over and over again. BORING. And that's a good thing, actually. In
fact, Svenja Gudell, Zillow's Economic Research Director states, "You want
boring in the housing market."
After a 20-month-long rebound, our local bay
area housing market is predicted to mellow in 2014, mirroring trends predicted
across the country.
To understand why 2014 will be different than the
previous year, you need to understand what
ignited the market in 2013. "Overall," Jed Kolko, Trulia's
Chief Economist, "regression analysis shows that recent
price gains are most strongly associated with the severity of the local housing
bust." He goes on to elaborate that, "All of the 10 metros
with the largest year-over-year price increases in December were hard-hit
during the housing bust. Asking prices fell by at least a third from peak to
trough in these 10 metros." His contention is that bargain-basement
prices caused an influx of investors and other buyers, eager to snatch up
properties at rock bottom prices. I concur, but would add that record low
interest rates and a large pool of ready and eager buyers all combined to
create a tipping point.
The result of 2013's record-breaking market is that in
many areas, prices are well on their way back to pre-bust levels. In other
words, we're returning to where we might have been had we not seen the
exorbitant increases from 2005-2007 and the ensuing crash. The analogy is a bit
like a well that ran dry during a severe drought and then was significantly
refilled after long-sought rains: now that it's nearly full again, its dramatic
refilling will not be repeated because it has almost reached capacity.
Bottom line: I believe that 2013's mind
boggling gains have been consigned to the pages of history and consequently
will not be seen again anytime soon.
As we venture into 2014, in sharp contrast to 2013's
significant market gains, I believe 7 Key Factors will combine and work in a
concerted manner to keep overall market gains under double digits for the year.
FHA has dropped loan limits.
a tightening of lending requirements, the FHA has dropped their loan limits in
higher-priced regions from $729,500 to $625,000. As a result, FHA buyers are
going to find their market choices severely constrained for 2014, especially
when you consider that all bay area counties have prices averaging above the
limit. As an example, the average price for a single family home in Alameda
County, CA for 12/13 was $648,899.
New Qualified Residential Mortgage guidelines
are now in effect.
in some quarters, I believe this will have a larger than anticipated
effect due to a convergence of several key features. In reality, it may be the
straw that breaks the camel's back. Debt limits will be limited to 43%,
especially affecting lower-income buyers who are already reeling from price
increases. Current estimates for mortgage approvals that have debt ratios above
43% are between 18% to 22% - not an insignificant range. While the 43% limit
might be overridden - it has to be with Fannie or Freddie's approval, which
requires a second signature and is running an additional 24-48 hours for
approval. In a market that is already extremely frenetic, there may not be
enough time for this extra step.
will be forced to limit loan origination fees to 3%, which could lower their
interest in providing loans for lower-priced homes. Additionally, self-employed
individuals will have a much harder time getting past the income verification
guidelines, reducing the number of self-employed persons who will be able to
all up and the guidelines, which went into effect on 01/14/14, are truly going
the number of qualified buyers that will be able to enter the
Interest rates are guaranteed to rise.
the economy well on its way to recovery, the Fed has stated it will wean itself
away from the massive long-term debt purchases of the past. This will ensure
rate increases. Pundits believe we'll see rates over 5% by the end of Q2. As
rates rise, some buyers who are currently at their extreme margins
will effectively be priced out of their preferred markets. This will
effectively put the brakes on the housing market to at least a minor degree.
The "lower-to-middle-price" buyer
pool will diminish.
vast segments of America on sale at bargain basement prices, investors hit the
market like a pack of piranhas, devouring the hopes of many first-time buyer
wannabes by snapping up everything in sight. With rabid investors throwing cash
at everything that hit the market, inventory was drained to the dregs and
subsequent pricing gains pushed many buyer hopefuls to the gutter. As prices
skyrocketed, investor profit margins were dramatically decreased, forcing
investors to begin looking elsewhere for profit centers. In the meantime, many
buyers, blown out of the market, ended up renting the very homes they'd been
trying to buy. As we enter 2014, investors are moving en-masse from areas such
as the San Francisco bay area. Rising prices, decreases in FHA limits and the
new Qualified Residential Mortgage Guidelines have also reduced the numbers of
qualified buyers. With the resultant decrease in buyers of all kinds, fewer
multiple offer scenarios are expected in this segment of the market.
Distressed home sales have virtually
it's true that some severely depressed areas of the country still have large
numbers of foreclosures and short sales, in most parts of the county the record
numbers of distressed properties have gone the way of the Stegosaurus. Their
demise signals a welcome end to bargain-basement pricing and blue-light
specials. It also signifies that the number of flips currently hitting the
market will be significantly reduced going forward into 2014. Normal sellers
are going to have to step up to fill the void and will more than likely be
willing to do so as their distressed competition disappears and overall prices
solidify on the higher end of the scale.
More sellers will put their homes on the
market was noted for a dearth of inventory as many sellers were either still
under water or were waiting to see where the market surge would carry values.
Additionally, many who wanted to move up were scared that they would not be
able to find a replacement home - a valid fear, in fact, in many arenas. As the
overall market decelerates in 2014, many sellers, realizing the top of the
market could be in sight, are projected to cash in on recent equity bonanzas.
Additionally, large numbers of homeowners previously under water are finally in
a positive equity position and can now sell without resorting to a
credit-damaging short sale. Lastly, as DOM (Days On The Market) numbers
increase, more move-up sellers will feel more comfortable with their chances of
securing a replacement home and will therefore be willing to put their current
digs up for sale.
New home builders are still struggling.
builders are back out in force and once again building new homes, they
are not seeing the rebound the rest of the market is experiencing.
One of the reasons is pricing - any buyers have been able to get major
discounts on existing homes and so have turned a blind eye towards builders who
have priced their products at the high end of the market. Builders, at least in
areas like Dublin, CA, saw a surge in sales in early 2013 and reacted by
boosting their prices with each new offering.
higher prices, in many cases, turned out to be way above the levels buyers were
willing to pay. This resulted in price decreases as some builders were dealt a
reality check and had to lower prices towards the end of the year. Local
Realtors can always judge the new home market by whether or not local builders
are willing to cooperate with commissions. When the market is down, builders
offer high commissions and incentives to induce local agents to bring their
buyers by. As the market strengthens, commission offerings are lowered,
incentives removed and, in some cases, builders refuse to cooperate with
Realtors in any way. These practices have not endeared builders to real estate
agents, many of whom are frustrated by builder tactics.
this to say, at the end of 2013, Bay Area Realtor inboxes were filled with
emails detailing builder incentives. New home sales, while up, are clearly
still being outpaced by the existing home resale market and are projected to
remain this way into 2014. Higher interest rates are not going to help.
is also a final factor that will run contrary to the rest of the market:
Luxury home sales will increase.
contrast to the remainder of the housing market, recent stock market gains and
subsequent flood of new IPOs are significantly boosting luxury home sales. This
trend will continue into 2014, especially in the San Francisco bay area whose
economic engine fueled by Silicon Valley is off and running on all cylinders.
Local tech giants are discovering that the best way to improve their strategic
edge is to buy up local startups. And buying they are. As many Silicon Valley entrepreneurs
are coming into massive amounts of cash, the average age of luxury home buyers
is plummeting dramatically as luxury home prices are spiking upwards.
Construction companies are also starting to score windfalls as many high-end
buyers are snapping up less-than-stellar properties in high-rent neighborhoods
and then spending massive amounts to get them renovated up to current specs.
Overall, we anticipate an increasing market
in 2014, but not at the rates seen in the past 2 years.
Look for gains in the region of 6-8% averaged over the
year. Many buyers still haven't received the memo as the first couple of weeks
of 2014 have seen a wave of buyers out in full force and the few available
homes being snatched up in short order with multiple offers. Many realtors I've
talked to, however, have a number of listings in the queue that are waiting to
come to market as soon as they are ready.
As this increased inventory hits the market,
I believe we may see a return to the first "normal" market in over
10 years. We can only hope.
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trends, housing, luxury prices increasing, New home builders struggling,
Qualified Residential Mortgage guidelines, QRM, QM, distressed home sale down,
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