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The Near Future of the Housing Market

Orange County, CA – Mortgage rates are starting to stabilize after months of continuous rising, experts believe. The average 30-year fixed mortgage dropped from a rate of 4.37% down to 4.31% over the course of last week. It’s still notably higher than last year’s 3.49%, and not likely to come down to that level any time soon, but at least it’s not still on the rise.

In the same vein, the National Association of Realtors report showed that 1.2% fewer homes sold in June than sold in May. That’s still 15% more homes than sold last June. Again, the growth rate is slowing, but the growth isn’t going away.

Why is this happening? We think it has a lot to do with the Federal Reserve’s plan to stop purchasing mortgage-backed securities. As they put the breaks on that spending, mortgage rates are going to start to rise — up from quite possibly the lowest rates we’ll ever see in our lifetimes.

Low interest rates and a risky securities market helped push more investment dollars into real estate. There’s nothing inherently wrong with speculative investors, but a surprising amount of the market has become dominated by them. This has made it hard for analysts to get a clear view of the “real” housing market.

As the interest rates go up, speculative investing will go down and the real nature of the market will be revealed. The real market is still being limited by an economy that’s suffering from hefty unemployment, underemployment, stagnant wages and increased rents.

Steve Blitz chief economist at ITG Investment Research, put it bluntly: “There may be pent up demand, but there’s no pent up wealth to go buy a house.”  Speculative investors have kept the market busy for as long as the low interest rates made it a good idea, but every jump of the average rate will drive some such investors out, and Joe Everyman just doesn’t have the savings to buy a house — or the credit and cashflow necessary to get a mortgage.”

Does this mean that we can expect to see home prices come down anytime soon? It’s hard to tell, but I feel it’s unlikely. The supply of new homes built over the past 6 years has been far less than what’s necessary to keep up with normal population growth. In my opinion, new home demand will exceed supply and continue to drive prices higher.

In addition, mortgage lenders are beginning to modify their policies to conform to the new Qualified Mortgage rules that kick in come January. Therefore, it will be more difficult to get a mortgage if you’re not a highly-qualified individual. This will further reduce the “pent-up wealth” available with which to buy houses.

Between the rising rates and the increased difficulty of qualifying for a mortgage in the first place, the number of people willing and able to buy a home are going to decrease — and once we reach the point where demand has come down enough to meet supply, house prices will necessarily readjust themselves around that new ‘normal’.

What do you think we’ll see? Contact me or comment on this post.

Scott Storace

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