End-of-year predictions are made annually for the housing market, but time is the only guaranteed way to establish if the predictions were correct.
Record lows were recorded for mortgage interest rates at the end of 2012. Although the rates have begun a steady increase, Frank Nothaft, Freddie Mac vice president and chief economist said the slow increase in mortgage interest rates will not disrupt home affordability for stable households.
“We expect single-family origination volume to come in close to $2 trillion in 2012, about a 30-percent rise from 2011, and then drop by about 15 percent in 2013 as refinance ‘burnout’ and somewhat higher mortgage rates during the latter half of next year lead to less refinance activity,” Nothaft said in a late 2012 interview with loans.org.
Nothaft said for the single-family market, homebuyer affordability is predicted to remain high in 2013 for potential buyers with stable incomes, good credit history, and sufficient savings.
The Current Demand
Paul LeJoy, real estate investor and founder of Pacific Realty Partners, said that even though rates are steadily increasing, there is a heightened demand for purchases among low-to-moderate income households.
The increase in cost for rental properties has caused some consumers to look once again at buying a home.
LeJoy said the Federal government’s commitment to keep interest rates low until 2014 has created a “pent-up demand” for homes among first-time buyers.
This increased demand has created a competitive nature among open properties.
“It’s very common to see multiple offers on properties,” LeJoy said.
In areas such as the San Francisco Bay area, some properties receive upwards of 50 offers, especially if it is located in a positive school environment.
“Some feel they may miss the boat and are now jumping on the bandwagon,” LeJoy said. “What’s the point of renting and paying a higher amount when one could buy and pay less.”
LeJoy said down payment assistance provided at cities throughout California, such as $80,000 in San Jose, are enabling more buyers to enter the housing market.
“With the interest rates still this low coupled with relatively low prices, housing affordability has never been more reachable for the average American,” he said. “Unlike the boom days of 2004 to 2007, the current market climate offers prospects the opportunity to attain the American Dream.”
Jonathan Daniel, CEO of real estate private equity firm, Silo Financial, said that even with small rate increases within the .25 to .50 range, it will not impact the housing market drastically. He said it would take a one to two percent change for a “huge impact.”
And statistical evidence shows that potential buyers are open to the idea of homeownership.
According to a Carlisle & Gallagher Consulting Group study, homeownership confidence is high with 90 percent of survey respondents expecting their homes to maintain value or grow significantly over time.
Additionally, the Fannie Mae National Housing Survey from October 2012 found that 72 percent of respondents believed it was a good time to buy a home.
Threat to Middle-Class Homeowners
Daniel warned of a large impact to middle-class homeowners if President Obama eliminates the mortgage deduction. The mortgage interest tax deduction allows homeowners to write off interest payments on their mortgage.
Eliminating this deduction will impact the middle class the most. Although it is not huge, it is still an impact, Daniel said.
“It is going to affect what you can pay for a house because it will affect what it costs for a mortgage,” he said. “The tax deduction is going to hurt if it goes away.”
Daniel said states such as California, Connecticut, New Jersey, and New York will be affected the most.
The same lures for homeowners holds true for investors in this housing market.
When the housing market crashed, so did common forms of investments. Interest rates for savings account diminished, and stock markets became too unreliable. Investors with large amounts of capital turned to institutions that purchased single-family homes for rental purposes.
Because of the mortgage crash, homeownership decreased but the need for housing did not disappear. Rental properties began to increase in value, and have continued their increase. Instead of buying buildings already established for multiple rental properties, investors purchased multiple single-family homes and used them as rental properties.
The pitch from investment firms to singular investors would go as follows: Investors would purchase several foreclosed homes, around the $50,000 price range, and rent them out. The investors would receive a seven to 10 percent interest return on rental income. This income would flow for up to five years, and then the investor could re-sell the property for around $75,000.
Daniel said due to the crash, this alternative form of investment was a great value for investors to make a sizable return on their investment — one that couldn’t be achieved with low savings interest rates or the unsafe stock market. Instead, the investment is based on a bet that the properties will continually appreciate in value.
“That is the pitch and the theory behind the investment,” Daniel said.
But even though institutionalized capital is found across the country, it is not set to change due to a slow increase in interest rates. Even though homes are regaining their property value, Daniel said it will not impact large investment companies because they already raised the money for the sole purpose of purchasing portfolios.
“They are going to still fight for portfolios of single family homes,” he said.
LeJoy said that low interest rates offer the same opportunities for investors as they do for owner-occupants.
“Pair low interest rates with investors and you get the perfect remedy for the economy,” he said.
One of the main reasons is that investors do not have to pay for the entire cost of the property up front. LeJoy said investors can put down as little at 20 to 25 percent for investment properties and then use the purchases as rentals or re-sell the house as a flipped property.
Increase in New Construction
As homeowner confidence and new mortgages increase, so does the need for new construction.
In late 2012, Freddie Mac predicted that housing investment will add to economic growth in 2013 — the first time since 2005. In 2012 alone, housing starts in the United States rose 25 percent, as compared with 2011.
“Look for these same positive signs to spur an increase in multifamily lending and in the overall stock of available rental housing,” Nothaft said. “Construction of rental apartments in buildings containing at least five dwellings began on about 200,000 units this year, the most in one year since 2008.”
LeJoy said because of the economic downturn, many construction professionals left the industry. Due to an increased need for housing, there is a need for more construction workers.
“There is a new need for construction workers,” LeJoy said. “I believe many developers will come out of the wood work to capitalize on this need.”
But Daniel said statistical increases in new housing do not properly depict the current state of construction.
“We are still well below the norm for new construction,” he said.
He said new construction statistics are based off a low set two to three years ago when there was no new construction.
“New construction halted,” Daniel said. “Yes, we are moving in a good direction, but don’t get skewed by the numbers because we are working off a very low bar.”
With the majority of 2013 yet to come, some overall predictions can be made. LeJoy predicts a heightening demand for housing will continue.
“My fear is that buyers cannot find enough houses to buy,” he said.
Even with a lack of properties for purchase, LeJoy is still hopeful about the near future.
“By every indication, it appears we have hit the bottom and it now looks like everyone is coming back to real estate,” he said.
But Daniels is not as quick to believe in the resurgence of the housing economy. Daniel said that although the housing economy seems to have stabilized, it is not clear yet.
“I think it is still challenging for people to qualify for mortgages. It is nowhere near normal,” he said. “There is a little bit of euphoria around it, but I think it’s a little too soon to say we’re out of it.”
Rebekah Coleman is a reporter at http://loans.org, a company dedicated to helping consumers sift through the ambiguous details of the financial industry. Loans.org aims to educate the public by providing free access to relevant and unbiased financial information. She can be reached at 909-784-2465 or via email at Rebekah@loans.org. Additional information about the housing industry can be found at http://loans.org/mortgage.