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Mortgage and real estate predictions for 2014

 
Think Tank
Robert Eyler,
 Ph.D.
Professor and Chair of Economics at Sonoma State University
Founder and Chief Economist of the Marin Economic Forum
Thomas Thibodeau,
Ph.D.
Academic Director at the University of Colorado Real Estate Center
Over 30 years of experience, Tom currently serves on the Technical Advisor Board for Zillow.com

This is the fifth installment of HSH.com’s Think Tank series which features in-depth questions and answers from the nation’s top real estate professors and professionals.

The holiday season is fully upon us and both homebuyers and homeowners are preparing for the new year. This year was a great time to be a buyer or a homeowner— mortgage rates remained historically low and homes were once again an appreciating asset.

But will this continue into 2014? What’s in store for homebuyers and owners? Can buyers still lock in a low rate? Will owners build equity as fast in 2014?

We asked Dr. Robert Eyler, Professor and Chair of Economics at Sonoma State University, and Dr. Thomas Thibodeau, Academic Director at the University of Colorado Real Estate Center, to weigh in on the state of the mortgage and real estate markets in 2014.

Q: Mortgage rates have increased more than half a percentage point in 2013. According to HSH.com, in January, the national monthly average for the 30-year fixed-rate loan was 3.70 percent; at the end of November, that rate was 4.36 percent. Where do you think mortgage rates are headed in 2014? What factors will influence rates the most?
Dr. Robert Eyler, Ph.D.
Professor and Chair of Economics at Sonoma State University

A: I expect mortgage rates will rise, reflecting the 10-year Treasury security market, which drives the 30-year fixed rate. (Adjustable rates are also driven by that.) Two other factors that will pressure rates up: continued tightness on the supply side of lending and increasing demand due to growth of the economy.

Dr. Thomas Thibodeau, Ph.D.
Academic Director at the University of Colorado Real Estate Center

A: I think mortgage rates will remain relatively flat for 2014. The overall economy and the Fed have the most influence on mortgage rates and, while the economy continues to recover from the Great Recession, the pace of recovery is very slow. In particular, the economy still has yet to recover the number of jobs lost during the financial crisis. While the Fed is expected to reduce its stimulus program, I think most of this expectation is already capitalized in current mortgage rates.

Q: Home prices have also increased in 2013. Year over year, home prices increased 12.5 percent in October 2013 compared with October 2012, according to CoreLogic’s Home Price Index. Do you expect to see home prices continue to rise in 2014, and if so, by how much?
Dr. Robert Eyler, Ph.D.
Professor and Chair of Economics at Sonoma State University

A: Housing prices will likely rise in between 3 percent to 5 percent nationwide. Two major phenomena that are depressing growth right now are growth of new construction and slower demand. Demand should continue to rise as our economy grows. A shrinking inventory of existing homes coming onto the market is helping to support increased housing prices. Interestingly, many real estate professionals suggest that increased demand may come from higher interest rates, which may drive more inventory onto the market simply to fulfill new demand. Prices in real terms are closing in again on the peaks we saw in the last couple decades, which means we are likely to see some adjustments and slower growth, but not a downturn, in 2014.

Dr. Thomas Thibodeau, Ph.D.
Academic Director at the University of Colorado Real Estate Center

A: The recent 12.5 percent annual increase in U.S. home prices is not sustainable. Much of this increase reflects house prices recovering from their dramatic decline following the financial crisis. Over the long run, and in most housing markets, house prices increase at the rate of inflation. The rate of inflation was less than 1 percent over this period, placing the inflation-adjusted rate of house-price increase at over 11 percent. This cannot continue indefinitely. It’s more likely that house prices will continue their recovery in 2014, albeit at substantially lower rates of increase something on the order of 3 percent to 5 percent nationally.