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Boom Or Bust?
I keep reading that there soon will be another housing bust and also that the real estate market is booming. So, which is it?
Both. Let me explain.
Existing home prices rose 9.9 percent in 2013, according to the National Association of Realtors. That is a extremely high rate of appreciation that, if continued, suggests that home prices nationally will double in a little more than seven years. Unless the value of the dollar is entirely eroded, it’s difficult to imagine that such price increases will occur. Therefore, the pace of appreciation is likely to slow.
The Department of Housing and Urban Development points out that real estate equity has increased by $3.4 trillion since 2011. It also says that since 2012, some 5.7 million homes no longer are financially underwater.
The figures suggest that the real estate market is booming. Unfortunately, there is another side to the coin.
National pricing trends do not reflect local markets. For instance, the NAR says that in the third quarter of 2013, home values rose in 144 out of 163 metro areas. That also means home prices fell in 19 areas.
Perhaps more importantly, some areas saw values increase at a rate that is not sustainable. The NAR says third-quarter 2013 prices rose 26.2 percent in the Los Angeles area and 41.8 percent in the Atlanta-Sandy Springs-Marietta, Ga., metro area.
To have quickly rising prices, you need a population of prospective buyers who can afford the higher values. There are two problems here.
First, incomes are not rising. Figures from the Census Bureau show that 2011 incomes were 8.9 percent lower than in 1999.
Second, mortgage rates are increasing. Rates in 2012 were the lowest in 65 years. Today mortgage rates are low by historic standards, but they are higher than the end of 2012 and early 2013.
Higher rates mean marginal borrowers can borrow less or not at all. Also, borrowers who recently financed or refinanced are not likely to be back in the mortgage marketplace anytime soon – in fact, the Mortgage Bankers Association says refinancing levels in 2014 are likely to fall by 60 percent, a huge decline.
The bottom line is this: We had a great run in 2013, but the odds are that home value increases will be generally moderate in 2014. We won’t have a bust in 2014 if we’re lucky – but surely not a widespread boom, either.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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