NEW YORK – Jan. 6, 2015 – Industry analysts and economists largely believe the real estate market will gain traction this year, but they acknowledge several challenges that pose a potential derailment to the ongoing recovery. CNNMoney recently highlighted several of those challenges:
Investors exit the market: Institutional investors accounted for 15 percent of all sales in October, a drop from 20 percent in January 2014, according to National Association of Realtors® housing data. "Rising home values are causing more investors to retreat from the market," says Lawrence Yun, NAR's chief economist.
Institutional investors purchased thousands of properties during the onset of the housing recovery, helping to propel the market in many areas of the U.S. But now with higher home prices, they may be looking to cash out.
"Home price appreciation has given those investors a good opportunity – and motivation – to sell and realize a solid return on many of their properties in many markets," according to a report by RealtyTrac that looked at institutional investor activity. RealtyTrac found that institutional investors who bought in 2012 could potentially earn returns of 38 percent to 43 percent if they sold in the current market.
But as investors lessen their stake in the market, first-time buyers, whose presence has been at 30-year lows, may be more poised to step in their place.
Lending criteria still tight: Realtors still say tight credit is holding many of their would-be buyers back and derailing transactions as buyers continue to struggle to qualify for a mortgage, though they have seen a slight improvement in lending recently, according to the latest Realtors Confidence Index.
"The increase in mortgage insurance premium payments for FHA-insured loans continued to be reported as an added financial strain for first-time buyers," the report notes. "Obtaining FHA financing for condominiums (typically the entry point for homeownership) continued as a major issue; many condominiums were reported as not meeting FHA eligibility requirements."
In December, mortgage-financing giants Fannie Mae and Freddie Mac announced they were easing lending standards, most notably with a 3 percent downpayment for qualified borrowers. But that doesn't mean all lenders will ease up on credit, Mark Zandi of Moody's Analytics told CNNMoney. Some lenders may continue to be uneasy about lending to borrowers with sub-par credit or who are unable to make large cash downpayments.
Rising mortgage rates: Mortgage rates are sitting near historical lows at the moment, under 4 percent for the 30-year fixed-rate mortgage, but don't expect that to last. Many economists predict rates will push up to 5 percent by the end of this year.
"If [the Fed] pushes rates up, it could have a big impact on the market," says Fannie Mae's Chief Economist Doug Duncan. Homebuyers – particularly in high-priced markets, such as San Francisco and Los Angeles – already paying large portions of their incomes to housing could face a further chip in affordability, economists say.
Foreign buyers buying less in U.S.: Foreign buyers helped fuel the housing market recovery, but there are signs their presence is receding. "As the dollar has strengthened, it made U.S. housing more expensive," Duncan says.
Chinese buyers continue to have a strong presence in the U.S. market, but buyers from Europe and Russia – where economies are starting to soften – are beginning to lessen their stake in U.S. real estate, says Yun. For example, in California alone, sales to international clients has plunged about 25 percent in the past year, according to the California Association of Realtors.
Source: "5 Biggest Threats to the Housing Market," CNNMoney (Jan. 2, 2015)
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