5 Threats That Could Derail the Housing Market
In last month’s column, I discussed some of the expectations and predictions for the housing market in 2015. And much of that was good news. We appear to finally be safely out of the housing market crisis that has plagued the last seven years or so. And while we hope that 2015 continues down that path of recovery, there are still several factors that could disrupt this progress. If you are thinking of becoming a buyer or seller this year, here are five things to watch for:
1. Fewer foreign buyers
In the last several years, the presence of foreign buyers has helped the housing market in its resurgence. There are signs, however, that point to this trend slowing dramatically. One of these factors is the strength of the dollar. The stronger dollar makes U.S. housing more expensive to foreign investors, especially for those in Europe where many economies are struggling. Russian buyers are especially having a hard time as they face plummeting oil prices, a weakening ruble, as well as international sanctions. According to the California Association of Realtors, the number of sales to international clients has dropped about 25%.
2. Investors cash out
Along with foreign buyers, institutional investors also played a large role in the housing market’s recent recovery. They bought up thousands of properties and turned them into rentals. But because home price increases have slowed, the timing is looking right for these investors to cash out and see significant returns on their investments. According to RealtyTrac, for those institutional investors who purchased a home in 2012, they could see a 38%-43% return if they sold now. This also means that far fewer institutional investors will be buying this year.
3. Difficulty in borrowing
Although homeowners were ecstatic to learn that lenders like Fannie Mae and Freddie Mac had recently backed off on some of their strict lending standards, it doesn’t mean that getting a mortgage is necessarily going to be much easier. Most lending companies may still be nervous about the risk involved in many buyers. Last month, I talked about the hoards of millenials that will be entering the market as first-time buyers. But these potential buyers come with limited credit histories and stacks of debt in the form of student loans. Other applicants may be previous homeowners who lost their home to foreclosure but are now looking to reenter the market. But these buyers come with damaged credit histories and other financial baggage. For these reasons, expect lenders to still be stringent with who they lend to.
4. Increasing mortgage rates
While many experts are predicting the mortgage rates to stay fairly mild this year, hovering around 5%, there are no guarantees. The Federal Reserve, which sets the bar in this regard, could very well come out with something much higher than people are expecting. Stan Humphries, chief economist from Zillow, says that if rates climb to 6%, it would mean that home buyers in high-priced markets would be spending more than half of their income on housing. This could stall the market if home prices don’t then drop to something more affordable.
5. Slowing income levels
Even though most people are applauding the strengthening job market, income levels are still not increasing at the same pace as housing prices. This disparity in growth, coupled with rising mortgage rates and tight lenders, could make it extremely difficult for home buyers to be able to afford a home in the city they want to buy in.
The housing market is not all doom and gloom, but it is important to educate yourself on the state of the market and what factors are at play in determining where it is headed. If you are thinking of selling or buying a home this year, a great place to start is by finding an experienced real estate professional who works around the clock to match up the perfect home with the perfect buyer. Please visit my website, https://carlosgsandiego.blogspot.com, or call me at 858-551-3380.