I found this article from DSNews well worth reading and thought you might find it interesting too. It speaks about national trends but relates directly to Redondo Beach real estate and other Beach Cities real estate as well.
It’s a long piece so I’ve highlighted a few things I found insightful.
RE/MAX Estate Properties, South Bay
Lesley Siegel Real Estate
Market Analysts Expect Slowdown in Housing Recovery in 2014
The housing market recovery is entering a new phase, according to the analysts at Capital Economics. They say the rapid bounce in home prices seen this year, which was driven by investors and tight supply conditions, will soon start to moderate, and the next stage of the recovery will be characterized by strengthening activity among owner-occupants and mortgage-dependent buyers, as well as a much more moderate pace of house price inflation.
Overall economic growth, on the other hand, will accelerate in 2014, according to Capital Economics, from around 1.8 percent in 2013 to 2.5 percent this year. The firm notes in its outlook report that monthly employment gains have already climbed back to the 200,000 mark. As the economy’s fiscal drag fades, it should more than offset the impact of rising long-term interest rates, the company’s analysts contend.
The Federal Reserve announced in mid-December that it will begin tapering its asset purchase program this month, but Capital Economics says any further increase in long-term interest rates that results will be “modest.” After all, the Fed is trimming its monthly buys of mortgage securities and Treasuries by just $10 billion. Officials strengthened the central bank’s forward guidance to emphasize rates are not likely to rise for at least another couple of years.
“And even if mortgage interest rates edge a little higher, the recovery in housing market activity should also continue,” Capital Economics said in its report.
Higher mortgage interest rates have taken a toll on housing market activity already, but further rate increases will see the recovery slow rather than reverse, its analysts stressed. Sales activity initially dropped when rates spiked, but the latest data suggest this was a period of adjustment rather than the start of a weaker trend, which fits with the fact that housing remains very affordable, they explained.
“We envisage 30-year fixed mortgage rates ending 2014 at 5 percent and 2015 at 5.5 percent,” they share in the report. There may ultimately be an upside to higher rates, according to Capital Economics’ analysts. This upside would come in the form of a quicker loosening in mortgage credit conditions now that lenders cannot rely on the refinancing boom to boost their profits, they suggested.
The supply of homes for sale is now increasing, Capital Economics noted in its report. In addition, rising prices and a reduction in negative equity are bringing willing sellers back to the market. Alongside a reduction in the number of heavily-discounted distressed homes for sale, the firm says this will drive a seachange in the composition of supply and trigger a loosening in overall market conditions as buyer demand increases, according to Capital Economics.
The rapid run up in house prices means that housing affordability has deteriorated over the past three months. But even though valuation and affordability metrics are becoming less favorable, the overall picture is still that housing is a good value and “on the cheap side,” the firm said in its report.
The National Association of Realtors’ (NAR) affordability index suggests that the typical U.S. household now has 166 percent of the income required to qualify for a mortgage on the typical home, down from 180 percent in Q3 2013. This deterioration in mortgage affordability means that average mortgage costs are once again above average rental costs, which may deter some households from leaving the rental market for homeownership, according to Capital Economics. Still, the firm notes that “[o]ther than the past four years, at no point during the 40-year history of the NAR figures has housing been as affordable as it is now.”
Similar conclusions hold in terms of housing valuations, Capital Economics explained, adding that the simplest valuation measure compares real house prices to their long-run trend level. On this basis, housing is 12 percent below fair value, according to the firm’s analysts. That figure is down from 21 percent below fair value two years ago, but the analysts say even now, prices still have room to increase before worries about overvaluation become pressing.
A second method compares house prices to disposable incomes per capita, and it suggests that housing was 14 percent undervalued in Q3. A third valuation measure paints a slightly different picture—the house price-to-rent ratio. On this measure, housing is at the fair-value mark. As the firm’s analysts already noted, mortgage costs come in above average rental costs now.
They say it looks like home prices will be up by 11 percent for 2013 as a whole. “We expect this year to mark the peak for house price gains, and anticipate that price rises will slow to around 4 percent per annum in 2014 and thereafter,” Capital Economics’ analysts predicted.