Home prices set to rise 3% in the US in 2014 but mortgage rates will rise
Residential real estate values in the United States will increase by 3% and it will be easier for borrowers to get a mortgage in 2014, according to predictions from property firm Zillow.
The firm also estimates that mortgage rates will reach 5% by the end of the year and home ownership rates will fall to their lowest point in nearly two decades.
To determine which markets will be the hottest in 2014, Zillow combined data on unemployment rates, population growth and its Home Value Forecast to give an early view into housing markets that are likely to experience heavy demand for homes, as well as increasing home values.
Top of the list is Salt Lake City, followed by Seattle, Austin in Texas, San Jose in California and then Miami. Making up the top 10 are Raleigh in North Carolina, Jacksonville in Florida, San Diego, Portland in Oregon and Boston.
Stan Humphries, Zillow chief economist, pointed out that in 2013 home values rose rapidly at about 5% nationwide and more than 20% in some local markets. ‘These gains, while beneficial in many ways, were also unsustainable and well above historic norms for healthy, balanced markets,’ he said.
‘In 2014 home value gains will slow down significantly because of higher mortgage rates, more expensive home prices, and more supply created by fewer underwater home owners and more new construction. For buyers, this is welcome news, especially for those in markets where bidding wars were becoming the norm and bubble like conditions were starting to emerge,’ he explained.
Erin Lantz, director of mortgages at Zillow, pointed out that as the economy improves and Federal Reserve policies change, mortgage interest rates will rise throughout 2014, likely hitting 5% for the first time since early 2010.
‘While this will make homes more expensive to finance, for example the monthly payment on a $200,000 loan will rise by roughly$160, it's important to remember that mortgage rates in the 5% range are still very low. Because affordability is still high in most areas relative to historical norms, rising rates won't derail the housing recovery. Unfortunately, this isn't true in all areas and affordability is starting to become an issue for some markets, particularly some of the booming California markets,’ explained Lantz.
However, Lantz added that it will be easier of borrowers to get a mortgage than it was in 2013. ‘The silver lining to rising interest rates is that getting a loan will be easier. Rising rates means lenders' refinance business will dwindle, forcing them to compete for buyers by potentially loosening their lending standards.’
Humphries added that home ownership rates will fall below 65% for the first time since 1995. ‘The housing bubble was fuelled by easy lending standards and irrational expectations of home value appreciation, but it put a historically high number of American households, some seven out of 10, in a home, if only temporarily,’ explained Humphries.
‘That home ownership level proved unsustainable and during the housing recession and recovery the home ownership rate has floated back down to a more normal level, and we expect it to break 65% for the first time since the middle of the 1990s,’ he added.