2014 housing forecasts filled with euphoria: Estimates looking at higher rates combined with higher prices and stagnant incomes.
Euphoria unlike housing inventory is in plenty supply when it comes to 2014 real estate forecasts. The glue holding the housing market comes from investors and generous banking policy. The one thing about economics unlike other hard sciences is that it happens in real-time. It also assumes certain rules are fixed but that really act more like clay to fit the whims of the power structure. It was interesting to see how few analysts at the end of 2012 predicted the massive run-up in real estate prices during 2013. What is typical of course is that analysts usually go with the momentum so it is no surprise that predictions for 2014 are rosier than they were for 2013 even though most are forecasting higher interest rates and most will acknowledge that this current pace is unsustainable. Yet higher rates will add pressure on income constrained households. Investors are already showing signs of pulling back in certain markets. Let us examine the 2014 real estate forecasting landscape.
Examining 2013 predictions first
Below you will find some predictions made late in 2012 in regards to 2013 housing:
Source: Calculated Risk
Most of the above forecasted price increases of 1.4 to 2.6 percent with the outlier being Barclays projecting a 4.6 percent gain in home prices for the year. Every one of these forecasts was dramatically off. Investor demand with tight supply created a dramatic rise in prices:
Prices were up over 12 percent for the year. That is a big difference. What is interesting is that home sale forecasts and starts were not that far off. New home sales look to be around the 460,000 range so most of the analysts nailed this. Housing starts ranged from the 900,000 to 1,000,000 annualized ranges so this also stayed within forecasts. Yet they were dramatically off on the price changes. For one, this is no open-market so it is hard to apply models on a market that is essentially driven by the Fed, investors, and artificially low inventory:
Supply while increasing early in the year retreated once again once rates spiked over the summer. Banks are fully metering properties out even though you have near record low levels of inventory and prices surging. Prices are surging precisely because of the slow leakage but this has caused a market fully dominated by investors. Some people act as if they missed the boat when they stood no chance against the investor crowd that relied on non-traditional financing. Remember the days of having to write a handcrafted letter begging the seller to give you a chance to buy?
What is interesting about the start of this year is we begin the year with a few givens:
-1. Prices surged dramatically last year (fastest rate since the last bubble)
-2. Rates begin the year at multi-decade highs and presumably will move higher thanks to the Fed tapering but also the success of the stock market / economic indicators
-3. Inventory is back to low levels
-4. High level of investors but a slow reversal in many markets
With that said, let us look at forecasts for 2014.
While the forecasts for 2013 were relatively conservative especially when we consider the source, the 2014 forecasts are downright optimistic:
Source: Calculated Risk
The most conservative measure comes from Wells Fargo predicting a 2.7 percent increase in prices. Merrill Lynch has the most aggressive forecast at 6.3 percent. What we should learn from the 2013 forecast is that chances are, all of these will be off. The question is, will these be off on the upside or downside?
What is interesting is that many of these forecasts already price in higher interest rates throughout the year:
Fannie Mae is forecasting a 30-year fixed rate mortgage rate of close to 5 percent by year-end yet has a 5.9 percent price increase for the year. We already witnessed how quickly the market momentum stalled out over the summer once interest rates went up. This will impact cash strapped home buyers who live on a razor thin margin for the monthly payment. Fees were set to go up on traditional mortgages but of course, the government and banking apparatus stepped in like a deus ex machina to keep the party going.
The housing market of today is driven by speculation and momentum. 2011 through 2013 was hot. Yet the slowdown is now starting. Depending on investor sentiment, this can tilt the market either way. The assumption is that when prices turn, investors will work collaboratively like banks to meter their way out of the mess. Of course there is no unifying protection system that has the power to freeze mark-to-market or that has the Fed’s blessing in terms of hedge funds or big money investors. Some may think 2014 is a good year to take money off the table and get back into the stock market which returned close to 30 percent for 2013.
Keep in mind these are analysts and organizations that live and breathe real estate. So what is your forecast for housing in 2014?