It's been a rollercoaster year for the U.S. housing market, but analysts at Realtor.com [1] say the patterns seen in 2014 could be the foundation for more stable growth in the coming year.
Earlier last month, the company predicted a comeback in first-time homebuyers as young adults prepare to take the next step in their lives amid improving economic conditions. With job growth and home inventory making strides toward recovery and mortgage rates remaining historically low, Realtor.com expects the momentum seen this year will carry over into the next.
"Overall, this year's housing market showed steady advances over 2013 with significant improvement in key housing metrics, despite some remaining challenges," said Jonathan Smoke, chief economist for Realtor.com. "Increases in job creation and gross domestic product have had a significant impact on consumer confidence and home buyer demand. Paired with historically low interest rates, these factors kept properties moving quickly."
In its year-end review [2], Realtor.com outlined some of the major trends seen in 2014 that signal a strengthening housing recovery, including:
- Improving economic fundamentals: After coming off the start line in a stagger, the U.S. economy bounced back from a weak first quarter and showed the strongest growth seen in years. On Tuesday, the Bureau of Economic Analysis reported that third-quarter growth came in at an annual rate of 5.0 percent—a reversal of Q1's contraction of 2.1 percent. Meanwhile, monthly payroll numbers continue to look encouraging, inspiring more confidence among Americans.
- Continually low mortgage rates: While interest rates remain above the rock-bottom lows seen in 2013, they're still averaging around 4 percent for 30-year fixed-rate products, even as the Federal Reserve takes a less dovish approach to monetary policy. Realtor.com attributes the trend to global economic weakness, along with actions by the European Central Bank and other Asian banks to battle recessionary conditions.
- Decelerating home price gains: While ongoing price increases had some commentators worried about a new housing bubble in the making, the large-scale slowdown of home price growth has brought the trend more in line with historical performance.
- Declining distressed sales: Foreclosures and short sales continued to fall throughout the year—and while that might have put a drag on total sales volumes, the share of non-distressed transactions grew over last year, indicating a healthier market.
- Investor pullback: Going hand-in-hand with the drop in distressed sales, the retreat of investors from the housing market created more room for traditional buyers, driving down competition and putting a cap on prices.
On the other hand, there remain a few headwinds that are likely to be a problem in the next year:
- Tight credit standards and limited mortgage availability: While there's been some debate on the issue of loosening lending criteria, mortgage data over the past 12 months indicates credit standards have seen little change, preventing many households from taking advantage of low interest rates. By Realtor.com's estimate, the "tight spread between approved and declined FICO Scores shut out nearly half of the potential population this year."
- Tight inventory: While inventory has seen some progress at the national level, supply has still failed to keep up with demand. In many markets, the months' supply of new and existing homes remains under the normal balance between a buyers' and sellers' market.
- Low levels of first-time buyers: According to recent data from the National Association of Realtors (NAR), the share of first-time homebuyers fell this year to its lowest in close to three decades. On the bright side, "the first-time buyer share is showing signs of modest improvement by the year-end," noted NAR Chief Economist Lawrence Yun. As federal agencies push to expand low-cost housing options, advocates hope to see a greater presence from first-timers in 2015.
- Record levels of renters and climbing rent prices: The national homeownership rate continues to look weak at 64.4 percent, indicating more adults are renting rather than buying. Unfortunately, as rent increases outpace home price growth, analysts are concerned that today's renters are unable to save to become tomorrow's buyers.
- Lack of recovery in homebuilding and weakness in new home sales: The new home market has struggled over the course of the year, and despite increasing confidence levels, homebuilders aren't breaking ground on as many homes as some would hope—especially in the lower price tiers. "New home prices increased substantially again this year, revealing that higher priced product is limiting the demand," Realtor.com said.