Is the Real Estate Market About to Be Tested?

May 16, 2013 No Comments »
Is the Real Estate Market About to Be Tested?

For months I’ve been talking about how it has become a seller’s market, what with the super low inventory and unbeatable mortgage rates.

Factor in the sizable reduction in short sales and foreclosed properties, along with strong investor demand, and you’ve got a recipe for mega home price gains.

This unique environment has indeed vaulted home prices higher in a few short months, creating bidding wars while generating serious buzz from journalists about the resurgence of a new housing boom.

But we’ve seen this type of cycle before, with each bout of optimism crushed by a subsequent swath of bad news.

The question remains, will this time be different? Will this housing rally finally have the legs to see us out of the up and down pattern we’ve experienced for the past five or six years?

We Should Find Out Soon

It’s been all good news lately in the housing market. Prices have risen substantially in most markets nationwide, and future appreciation is expected to be strong. Or at least it was.

Home prices increased a staggering 7.3% nationwide in 2012, according to a new report from CoreLogic Case-Shiller.

That was the highest rate of appreciation in almost seven years, large enough to start worrying about a bubble.

At the same time, mortgage rates have continued to defy all odds, staying much lower for much longer than anticipated.

The past predictions have repeatedly been wrong, and the experts have had to go back to the drawing board on more than one occasion to push out the expected date of an increase.

But, is that finally beginning to change? In the past couple weeks, interestingly right after a solid jobs report, mortgage rates have been in a huge uptrend.

[Mortgage rates vs. unemployment]

After hitting new record lows, they’ve shot straight up to 2013 highs, as if the party is finally coming to an end, for real this time.

As I’ve noted, home prices aren’t necessarily cheap themselves, just mortgage payments, so if rates rise, values may have to come down, or at the very least, slow down.

Home Prices Expected to Rise Just 2.5% in 2013

appreciation

And that’s exactly what the brains over at CoreLogic believe will happen. They see home prices rising just 2.5% nationally over the next year.

That’s about a third of the annual increase seen in 2012, and kind of puts a damper on things going forward.

It should also make one think twice before bidding on every house available in the hopes of getting just one to bite.

There are several reasons why home prices are going to cool. Aside from higher mortgage rates, there should also be a supply/demand shift.

Over the past year or so, investors have scooped up thousands of single-family homes that they plan to rent out.

Seeing that home prices have surged, many of these investors will exit as prices become less attractive.

Additionally, the increase in home prices will free up a lot of homes that were previously stuck underwater.

Zillow already noted about a week ago that housing inventory has begun to increase after remaining super tight.

Higher home prices will also spur new home building, seeing that there is a bigger reward for getting projects off the ground.

Finally, there’s that psychological aspect – would-be sellers are finally hearing all the reports about homes flying off the shelves, so this should entice many more to list their properties as well.

When all these pieces come together, that seller’s market is going to be put to the test in a hurry.

The good news is that this should balance the real estate market again. Sure, it’s a bummer that home prices can’t rocket back to the moon, but slow and steady is better than up and down for most individuals.

This should also kill the worries of a bubble, and make it a lot easier for first-time home buyers and other everyday Joes to finally get their hands on a property without paying an arm and a leg above list.

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