Buying a Home: Will it Get Tougher in 2015?

Recently released figures show builder confidence is up. That's good for builders, but it is also a call to action for prospective home buyers. They may want to get in the market soon, because when builder confidence is up, the cost of buying a home may be headed higher as well.

First, the Good News

According to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), builder confidence has recovered nicely after slumping earlier in the year. The HMI is a survey of new home builders that is structured so that a reading of above 50 means that more builders are optimistic than pessimistic. After ending 2013 on a decidedly positive note with an HMI of 57, builder confidence faded in early 2014, reaching a low of 45 in May. This was an understandable reaction to a general economic slowdown in the early part of the year.

However, the economy has recovered as the year has continued, and so has builder confidence. The HMI improved by four points to a level of 58 in October, and has now been above the pivotal 50 mark for five straight months. This suggests that builders are consistently being encouraged by what they see in their marketplaces.

Now, the Bad News

Those numbers may all point to a pretty cheery outlook, but prospective buyers must remember that they are on the other side of the fence. As the housing market improves, it means buying a home is getting more expensive. If home builders are especially optimistic about conditions six months from now, it means that people who know the market expect prices to be higher in mid-2015 than they are now.

Already, home prices have improved considerably since hitting bottom in early 2012, according to the S&P/Case-Shiller National Home Price Index. That progress stalled in late 2013 and early 2014, but it has revived over the past six months or so. The good news for home buyers: prices are still below their prior peak levels. However, they are heading in that direction.

Higher Mortgage Rates Could Pile On

An additional concern home buyers should have is that rising builder confidence reflects an improving economy. When the economy improves, there is more demand for investment capital, which typically leads to higher interest rates.

Along with higher demand for capital, a stronger economy could also bring inflation worries. Inflation has been unusually moderate over the past year at just 1.7 percent. A key factor has been declining energy prices. According to the Bureau of Labor Statistics, the energy component of the Consumer Price Index declined by 1.6 percent over the same time period. Given the extent to which large, developing economies such as China, Brazil, and India feed on energy, a decline in energy prices has to be seen as a temporary aberration. Lenders need to set their loan rates over the rate of inflation, so if inflation increases steadily, expect mortgage rates to follow.

Forecasting higher mortgage rates does not depend on anything extraordinary happening. It would only mean a return to more normal economic growth and more normal inflation conditions. When you consider that normal mortgage rates are considerably higher than current rates, the more the economy returns to normal, the more it points to higher rates in 2015 -- perhaps significantly higher.

Act Decisively and Pick Your Spots

Under these conditions, the best advice for anyone buying a home is to act decisively but selectively. Don't delay getting into the market, but don't rush your decision either. National trends have a general impact on local real estate markets, but ultimately housing and mortgage conditions are highly variable. Not only do home prices vary greatly by region, but within a region they can be sharply different from neighborhood to neighborhood, and even within a given neighborhood there can be particular bargains for sharp-eyed buyers.

As for mortgages, here too the market varies. Lenders react to changing rate conditions in different ways and at different times, so shop around for mortgage rates and get competing quotes specific to your needs and credit situation.

It may well be that home prices and mortgage rates will both head higher in 2015. However, buyers who get into the market decisively and are selective about their property and mortgage choices can avoid the worst of those increases.

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