This year will yield a new set of challenges for the housing market and overall economy to overcome. A strengthening job market, improving economic conditions and an accommodative Fed helped fuel a great year for stocks and housing in 2013. However, housing demand weakened towards the end of the year, mainly due to rising mortgage rates but also other contributing factors like the government shutdown. While we expect the market to continue to climb higher in 2014, there will likely be more obstacles to overcome. Below are some that we feel might have a significant impact on housing over the course of 2014.
What course of action will the Fed take on monetary policy decisions? Newly confirmed Fed Chair Janet Yellen will have to carefully navigate unchartered territory as the Fed seeks to taper their bond buying while also making sure there are no adverse effects on the economic recovery. Philadelphia Fed President Charles Plosser, who is known to be more hawkish, becomes a voting FOMC member this year which may collide with the Fed’s accommodative policies at the current time.
Can strong economic and job growth continue? Jobs data released this morning showed that hiring slowed in December with the economy adding only 74,000 on a seasonally adjusted basis. Both the economy and labor market gained considerable traction in 2013 and that momentum will be a key determinant on whether housing continues to recover or not this year. The forecast for job growth on Zonda,which is a new mobile application serving the residential homebuilding industry, shows that 2014 will be the strongest year of job creation since 2000.
There were a number of regulatory changes that went into effect at the start of 2014. The Consumer Financial Protection Bureau adopted new Qualified Mortgages (QM) regulations. Temporary loan limit increases for FHA loans also expired at the end of last year. Extended unemployment benefits also expired and new healthcare reform starts going into effect.
Uncertainty over fees and loan limits at Fannie Mae and Freddie Mac. The mortgage giants were set to increase their base guarantee fee and make changes to other fees they charge that would have resulted in an increase of 0.14 percentage points on a 30-year fixed rate mortgage. However, these planned fee increases have been temporarily delayed by Melvin Watt, who was sworn in on Monday as the new director of the Federal Housing Finance Agency. There has also been talk of cutting conforming loan limits at the mortgage giants as well. Both events would have a significant impact on the housing market.
Will the flurry of merger and IPO activity continue? Last year marked the most active year for homebuilder IPO’s in 20 years. The New Home Co. LLC and City Ventures Inc. delayed plans to go public last year but may still do so at some point this year. There was also a lot of M&A activity in the builder space which may continue as prime developable land becomes more scarce and builders try to achieve greater economies of scale.
Mortgage rates are expected to steadily climb throughout 2014, especially as the Fed takes the pedal off QE. Higher fixed rates means that more borrowers will opt for adjustable rate mortgages. Since this time last year, the ARM’s share of total mortgage application activity has more than doubled from about 3% to close to 8%, according to data from the Mortgage Bankers Association. Slowly rising rates themselves should not have a significant negative effect on homebuyer demand if it is accompanied with a growing economy and job market. However, if rates are rising for other reasons like to combat inflation while lending may tighten up due to stricter regulations, that poses a significant threat to the housing market.
Gains for housing and equities in 2013 came in a relatively easy fashion. The easy money has come and is likely gone. Political differences, shifts in Fed policy, sharp gains in stocks and home prices over the past few years and the potential for slower economic growth in the U.S. and abroad will require more savvy decision making. Utilize the expertise at Meyers Researchto help successfully nagivate your business through 2014.