Rising Home Prices. New home construction took a step back over the last 6 years, as developers faced a daunting housing market with tight credit, challenging economic conditions for would-be buyers, and declining prices due to the housing bubble's impact on home equity. A report by the National Association of Realtors (NAR) asserts that roughly 1.25 million to 1.5 million new housing units need to be built per annum simply to keep up with population growth. Yet, over the past 6 years, housing starts have averaged 500,000 per annum. This has created a shortfall in housing. And simply due to supply and demand, we can expect a period of continued growth in housing units. As these units hit the market, they will undoubtedly be bid up by buyers whose rents are higher than a mortgage payment due to the low rates we see today.
Rising Rents. Many Americans in their twenties and thirties have been riding out the economy by consolidating housing with friends, or sometimes moving in with parents. As the economy continues to improve, and as they begin to enter the workforce, these Americans will are seeking their own apartments. Thus, we will continue to see pent up demand for rental units. Several surveys show rising rents across the country; in some cases, rents have been rising at an average of 4% and 7-9% in some high-density metro areas. Again, based on supply and demand, these newly employed individuals will bid up the price for rental units as landlords trickle more units onto the market.
Fewer Banked-Owned Bargains. Continue to see fewer foreclosure opportunities on the market. This is due to the fact that equity positions for many previously underwater homeowners continues to improve, bringing about more favorable conditions to negotiate terms with their lenders. Since March of 2011, foreclosures have decreased by 11% per a report done by the Federal Housing Finance Agency (FHFA). As lenders work out loans with borrowers, fewer foreclosed properties will be sold through banks, servicers, FDIC, and other would-be sellers.
More Short Sales. As foreclosures decreases, short sales should increase. In November of 2012, FHFA passed new rules mandating changes in the short sales process for Fannie Mae and Freddie Mac loans. Part of these changes included reduced documentation for borrowers to demonstrate hardship, and near elimination of the need for borrowers to pay any difference between the final sales price and the outstanding balance. As these new rules come into play, lenders will have a clearer, less obstructed path to short sales, which benefits the lender, servicer, borrower, and new buyer.
Inventory Expansion. We\'ve already noted that there is pent up demand for housing units. A few factors support continued expanstion of housing units. For one, rates are at true historic lows. At most cases, a mortgage payment (with taxes and insurances) is equal to or less than would-be rental payment. This is an economic incentive that will motivate renters to become owners. Across the country, more and more indicators suggest housing truly has hit a bottom. This is yet another incentive for buyers would aspire to build equity through homeownership. There is also limited supply, as we\'ve noted, which ultimately impacts how home prices are bid up as they enter the market. These factors combined strongly suggest that inventory expansion will have its way in 2013. For one, rising prices encourage new construction from builders. And secondly, rising prices will motivate owners to sell their properties. So expect more inventory to be created through new construction and existing sales.
Rising Mortgage Interest Rates. Mortgage rates are at historic lows. As problems continue to be worked out in the European Union, the dollar will continue asserting its safe-haven utility. But at a certain point, funds will demand higher yields regardless through US bonds or alternative assets. So yields will have to begin climbing up to sustain investors (other than the Fed), or else capital flight will seek new investments. In short, rates can only really go up from here. Sure they can go down minimally over a few months, but the long-term trend over 2013 is that rates will potentially begin going up in order to support a more sustainable economy.
Easier Credit Standards. Up until now, qualifying for a mortgage has been a challenging experience for many Americans. For avergae FICO score lenders seek is a 760. Have anything that stands out, such as a credit card late payment or irregular employment, and the lender may scrutinize your file in an abnormal fashion. This will change though, as more borrowers enter the mortgage market in 2013 and lenders fight for their business through more flexible underwriting and an easing of standards. There will still be a baseline that must subscribe to Fannie Mae and Freddie Mac guidelines, but the overlays employed by individual lenders will surely change to compete in the market.
Cheers to a successful 2013!