Five Things To Watch In Housing In 2015

By NICK TIMIRAOS for WSJ blogs

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The housing market in 2014 put to bed the idea that the hard-hit sector might see more of a V-shaped recovery.

Sales began to slide midway through 2013 amid rising prices, thin inventories and a sudden surge in mortgage rates. The past year got off to a slow start after a brutal winter.

For the resale market, 2014 wasn’t a total bust. Through November, sales were down around 4% from the prior year, but they began to post year-over-year increases in October. The new-home market was a bigger disappointment, however, with sales volumes barely increasing over their year-earlier levels. It’s a good reminder that the recovery in the housing market is likely to be long, slow and choppy.

What does 2015 have in store? Here are five areas to watch:

1. Affordability: Prices rose 4.6% for the year ended October, according to the S&P/Case-Shiller index. Three years ago, when a bottom in home prices was just taking hold, that kind of gain would have been cause for celebration.

But prices have risen 25% over the past three years. That makes last year’s gain look far less impressive. It also has made homes much less affordable, even though mortgage rates this past year drifted back below 4% for the 30-year, fixed-rate mortgage.

Figuring out whether sales will pick up in 2015 could depend on whether there’s more available for sale, and if those sellers get real: In most neighborhoods, prices aren’t rising the way they were one or two years ago.

There’s also the risk in some markets that prices could dip. Already, home builders in Phoenix have had to cut prices after a disappointing year in sales. Slower price gains help on the affordability side, but they also rob the market of the urgency that motivates buyers.

2. Mortgage availability: It’s no surprise to anyone who’s tried to buy a house in the last five years that the process is much more burdensome. Banks are being very careful to document a borrower’s income, the source of their down payment funds, and anything else that might cause them to face higher costs should the loan later default.

The good news is that in 2015, a series of policy changes should take effect that are designed to make the process less taxing, at least at the margins. Fannie Mae and Freddie Mac, the mortgage-finance companies, are also rolling out plans to accept some loans with down payments of just 3%.

But some market analysts say that, for all the red tape, it’s not often as impossible to get a mortgage as it sounds. The 3% down-payment rule, for example, isn’t likely to deliver a glut of new borrowers because loans with 3.5% down payments have been available throughout the crisis through an insurance program run by the Federal Housing Administration. The bottom line: if incomes don’t much rise, don’t expect a huge boost in sales from any slight loosening of the credit dials.

3. Interest rates: Mortgage rates were a huge wildcard in 2014. In each of the last four years—but especially one year ago—there was broad consensus that mortgage rates would rise over the coming year. Instead, they fell last year, from around 4.7% at the beginning of the year to around 4% by year’s end.

If the Federal Reserve does begin to raise interest rates from near zero, mortgage markets could be in for a rocky ride. If, on the other hand, worries about global growth drive investors into the safety of Treasury bonds, or low inflation leads the Fed to push off rate increases, mortgages could stay low.

4. Inventory: Bill McBride, who writes the popular CalculatedRisk blog, frequently reminds his readers that in the resale market, active inventory—more than total sales volumes—influences pricing. In 2014, sales were so-so, but inventory remained low, which is why prices continued to rise—albeit at a far slower pace than in 2013.

The home-buying season typically begins in earnest in early February, and picks up in the spring. If there’s a big surge in inventory, then that could be a good omen for sales volumes (it’s hard to buy homes when there’s nothing for sale), but it could also make it harder to raise prices.

5. New construction: Builders catered less to the entry-level market last year, focusing instead on putting up bigger, prettier homes that carried heftier margins. That meant fewer sales and less construction. This worked pretty well in 2013, as it allowed them to pass on rising labor, land and materials cost to very willing buyers.

It had less success in 2014. Sales of new homes stood just 0.2% above their year-earlier level during the first 11 months of 2014. New single-family building permits were up just 1% over the same period. (Apartment construction, on the other hand, boomed).

The headwinds facing younger buyers are well known by now: student debt, tighter mortgage credit, slowly growing incomes and a preference for urban living, where housing costs are more expensive to start.

One tailwind: rents are still rising, which could spur those who have the means to make a down payment to buy a home. Whether sales pick up in 2015 depends on whether buyers begin to put up more entry level homes, and whether more pent-up demand for housing is released.

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