If you're thinking of buying a home in 2014, there's only one top tip: Act as quickly as you can. That year looks set to grow more and more unfriendly to those who want to get on the housing ladder (or trade up to a more expensive home or refinance), and the sooner you can do your deal, the better that deal's likely to be. Here's why.
Housing Affordability Likely to Decline
There are three key components to housing affordability: home prices, mortgage rates and incomes. And they all look set to become less helpful to home buyers in the coming 12 months.
As a national average, home prices shot up by 12 percent in the year ending September 2013, according to data from CoreLogic. Some economists expect that rate to slow in 2014, but few, if any, think real estate is going to get any cheaper.
Fannie Mae's economics team currently forecast that the median price for existing (as opposed to newly built) homes is going to be $210,000 in 2014, compared with $196,000 the previous year. Their more conservative opposite numbers at the Mortgage Bankers Association (MBA) think the same figures are going to be $202,000 and $194,900.
But any increase is only going to make it harder for home buyers. The only exception is those currently with negative equity (their home's market value is worth less than the amount still owing on their mortgage), who might at least find it easier to move when that situation reverses. But, if they plan to trade up, the more expensive property they want to buy is also likely to have appreciated at a similar rate, which means the gap between the dollar value of the two homes is going to have widened.
Home loan rates have drifted up during 2013. In January, those for a 30-year fixed-rate mortgage averaged 3.41 percent. By November, that figure was 4.26 percent, according to Freddie Mac. And that trend looks set to continue. Fannie Mae expects the same rate to be 4.8 percent by the end of 2014, while the MBA is forecasting 5.1 percent.
Even those numbers may be too low. In December, LendingTree's Gerard Anthony wrote that the Federal Reserve's Federal Open Market Committee says it plans to respond to future improvements in the economy, and those responses will certainly push mortgage rates higher. How likely is the economy to improve? On Dec. 12, Moody Analytics reported, "preconditions are in place for much stronger economic growth in 2014," and described it as "a breakout year."
The good news is incomes are growing. In the 12 months ending in December 2013, average hourly earnings rose by 2.0% over the past twelve months. Because that exceeds the 1.0% rate of inflation during the same period, consumers have a little more buying power.
However, there are two pieces of potentially bad news. First, that increase is across-the-board, and those on lower incomes are likely to be no better off, and often worse off. And, secondly, even those who've had a real rise are unlikely to find it's enough to offset increases in mortgage rates and house prices.
Mortgage Availability Decreasing
As if that weren't enough to have you scrambling to get your down payment together, there's a whole raft of new measures that should make it tougher to get a mortgage in 2014.
Higher Barriers to Qualifying
First up are new rules from the Consumer Financial Protection Bureau, the phasing in of which is scheduled to begin on January 10, 2014. While these cap costs and ban some features that made so many pre-recession mortgages toxic, they also force lenders to be more choosy when deciding to whom they should lend.
Once the new regulations are fully up and running, every application for a mortgage is going to have to be examined closely against eight criteria, and each point fully documented and verified. These criteria are intended to make sure a borrower can comfortably keep up payments, and include assets, credit history, other debts, income and employment status. Failure to carry out this process properly opens up the lender to a law suit later on, if the borrower gets into trouble.
Lenders can reduce their exposure to this risk by conforming to rules for so-called Qualified Mortgages. For one of these to be granted, a borrower must have no more than 43 percent of her monthly income taken up with debt payments, including those for the new home loan. However, a consumer who gets into trouble may still have grounds to sue if the loan's rate is at a level paid by sub-prime borrowers. Once the qualified-mortgages rules kick in, these are going to be the only types of loans Fannie Mae and Freddie Mac can buy.
Regulators say the new rules will hardly affect the level of loan approvals, but many in the industry, including the MBA, claim they could significantly constrict lending. We can only wait to see who's right.
Lower Limits for FHA Mortgages
Federal Housing Administration (FHA) mortgages are the ones that come with a down payment of as little as 3.5 percent. Few areas of the country will get an increase in their FHA loan size, while in the very highest cost areas, their FHA maximum loans will be reduced from $729,750 to $625,500.
FHA Mortgage Insurance Premiums Already Up
The FHA unveiled significantly more expensive mortgage insurance premiums (MIPs) for the loans it backs in April 2013. It also changed the rules so you may have to pay annual MIPs for the entire term of your mortgage, not just the period when your loan is most risky.
Might MIPs rise again in 2014? There's been no announcement, but you may want to buy before April comes round again.
Still a Good Time to Buy
By now, you're probably wishing you'd done your deal in 2012 or '13, when rates and home prices were lower, and few if any of those new regulations and other barriers to home ownership had come into force. Don't beat yourself up: the chances are, you had no choice but to wait.
By historical standards, though, this is still a very good time to buy. Current rates remain low, and, in many local markets, home prices are yet to reach pre-crash levels. Meanwhile, as recently as late September, a study found that buying a home is 35 percent cheaper than renting. So take heart. You may have missed out on the very best deals, but the opportunities in 2014 are still highly appealing.