The housing market is beginning to look like a house with a fresh coat of paint but some cracks in the foundation -- it looks okay on the surface, but there may be some underlying structural problems.
It may just be the harsh winter. It may be the fact that 30-year fixed mortgage rates ended February 86 basis points higher than a year earlier, according to mortgage finance company Freddie Mac. Either way though, these are conditions that home owners should take note of, and prospective buyers should not feel to complacent about them either.
Signs of Softness
During the last week of February, the S&P/Case-Shiller Home Price Indices reported that their 20-city composite gained 13.4 percent in 2013, the biggest calendar-year gain since 2005. That's the good side of the housing market, but that same week also brought multiple signs of softness either in or affecting that market:
- The Bureau of Economic Analysis reduced its estimate of the fourth quarter GDP growth rate from 3.2 to 2.4 percent. This is a long way down from the third quarter growth rate of 4.1 percent. The economy is still growing, but that the pace of growth has slowed sharply.
- While the S&P/Case-Shiller housing indices had nice year-over-year gains in 2013, most of that happened in the first half of the year, when mortgage rates were lower. Once low mortgage rates disappeared, so did the housing market's momentum, and prices actually declined a little in the final two months of the year.
- 30-year fixed mortgage rates ticked up again in the last week of February, marking their third consecutive weekly rise. While they settled back down again in the first week of March, their pattern over the past several months shows no suggestion that they will head back down towards the 4 percent mark.
- The Mortgage Bankers Association reported that overall mortgage application volume dropped by 8.5 percent in one week. This brought new purchase applications down to the lowest level since 1995. Perhaps that could be blamed on the weather, but refinance applications fell even more sharply, which most likely has more to do with higher refinance rates.
- JP Morgan Chase, which the National Mortgage News reports is the second largest US mortgage lender behind Wells Fargo, will cut 6,000 mortgage-related jobs this year, after having already cut 11,000 such jobs last year. While making those cuts, Chase forecast that its mortgage business would not turn a profit in 2014.
Home owners have a major asset - in many cases their biggest asset - at stake in the fortunes of the housing market. Would-be buyers should also sit up and take note of these developments as well.
Trouble for Homeowners
Naturally, these developments spell trouble for homeowners on a number of fronts:
- If housing prices are showing signs of weakness, it could make selling a home more difficult.
- The flattening out of home prices could suppress home equity values, which can limit home owners in terms of the size of home equity loans they can get, and in terms of refinancing opportunities.
- With mortgage rates seemingly firmly established well above 4 percent, home owners not only have to worry about higher home equity and refinance rates, but if they want to sell their homes they have to worry about the impact of higher rates on buyer finances.
What Buyers Should Watch
While prospective home buyers might be encouraged to see the rally in home prices stalling - after all, that could make houses available at more reasonable prices - they should also keep a careful eye on recent developments for a couple of reasons:
- With mortgage rates bouncing up and down from week to week, there is bound to be some inconsistency in the market. This means buyers should shop actively to get the best rates.
- The large-scale cuts to the JP Morgan Chase mortgage department should raise concerns about the supply of mortgage loans. Prospective buyers should be especially attentive to keeping their credit in tip-top shape. Having been burned before, lenders are going to be especially selective about making loans in this environment.
While 2013 was a good year for the housing market, that market did not enter 2014 hitting on all cylinders. Whether they are home owners looking for home equity loans or shopping for refinance rates, or new buyers trying to get their first mortgage, the overriding message is that this a challenging market which calls for informed consumers. Use your resources to remain actively informed about what the market in your area is doing, and about who is offering the best mortgage, home equity, and refinance rates.