Federal Reserve’s Long-Lasting Suppression Of Interest Rates

Thanks to the Federal Reserve’s long-lasting suppression of interest rates, mortgages have been available at extremely low rates. However, according to Lawrence Yun, the chief economist of the National Association of Realtors, things are about to change going into next year.

At the 2013 National Association of Realtors’ yearly conference, Mr. Yun predicted that home sales will stay fairly flat going forward, with an estimate of 5.1 million homes. Prices will go up by 6 percent, and interest rates will begin jumping in the first quarter of 2014, moving from their current position of 4.16 percent to as high as 5.4 percent in 2014. The quickness of the increases will vary with the announcement of new policies by the Fed. The sooner the Fed announces changes to the bond purchase program and interest rates, the sooner the market will alter.

While the housing market is heating up, Mr. Yun believes that there are several forces working against one another that will keep sales volumes steady. In spite of the greater ease of moving homes, the higher interest rates will depress sales. However, the possibility of more liberal standards for qualifying homeowners for mortgages and stronger job growth will also push sales up a bit, leading to a standoff.

There is currently no expectation that the Federal Reserve will raise rates in 2014. However, investors are speculating that the increases will begin in 2015. This is why long-term rates will start to tick up ahead of time. The Fed is also expected to start tapering its program of purchasing bonds backed by mortgages. Currently at a level of $85 billion a month, this program was designed to keep interest rates low and boost economic expansion.

With regard to new homes, Mr. Yun’s predictions are somewhat rosier. He estimates that new construction of homes will jump from 430,000 to 510,000, about an 18.5 percent increase. The new home supply is currently at historically rock-bottom levels, because smaller developers have had difficulty finding the financing to begin development. As far as prices go, new homes will cost about 5 percent more in 2014.

One reason for the jump in prices is the drop in availability of new homes. A lack of available inventory in the new-house market has made demand increase proportionally.

Given the fact that the housing market has made significant strides since 2011, there are some who view this forecast as a bit pessimistic. Since 2011, the median home price has gone up 18 percent, and sales of existing homes have gone up by 20 percent. However, the balance of forecasts regarding trends in 2014 tend to mirror those of Mr. Yun. The specter of rising interest rates and ongoing confusion about the way politicians will deal with the national budget and debt ceiling make for some economic uncertainty.

John Burns Real Estate Consulting has a somewhat rosier outlook for existing home sales, projecting them at 5.3 million for 2014 instead of 5.1 million. This firm also predicts new home sales going up to 550,000 instead of just 510,000. The real estate listing service Zillow published a survey taken from 108 housing experts, and the mean increase predicted among the group was 4.3 percent in 2014.

Realtor Jim Pyke from Vail, Colorado, has only sold six properties so far in 2013. He cites income instability and employment fragility as key factors hindering the housing market. Also, the mortgage qualification rules, which remain quite tight after the housing crash of 2009, also keep sales low. The fact that credit is harder to come by means that people are having a harder time even entering the home-purchase market.

What does this mean for purchasers going into 2014? You’ll have to budget a little differently for your mortgage over time. There is the possibility of securing shorter-term mortgages or even a 5/1 ARM for your property, if you think that rates are going to go back down. There are no major voices in real estate predicting that rates will correct back downward, however. The rock-bottom rates have been a tool to keep the market growing and the economy from careening into a ditch. As the economy continues to strengthen, interest rates will continue to climb. This will keep some people out of the housing market, but it will also make profits higher for those who do manage to sell. On the whole, the news is good for those who view their homes as an investment, as the price plummets that have taken place over the last four years appear to be a thing of the past.

Source by Douglas Lenski

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