Home prices, which have been rising at a rate of 10%-12% — depending on which source used, will rise at a much slower rate in 2014 because more supply will come on to the market. Inventory is now below the usual six-month average, credit remains tight and unemployment and underemployment will remain at high levels.
About 40% of Americans have low or negative equity in their homes, says Miller. “They can’t trade up, make a lateral move [or} downsize, so they sit.”
And those who have the means to move will find that mortgage rates are higher — in part because of the Fed’s recent decision to reduce purchases of Treasuries and mortgage securities — and qualifying for a new loan will be tougher.
Under the Dodd-Frank financial reform law, lenders are required to meet new underwriting standards for qualified mortgages (QM) if they want greater protection from lawsuits. A QM loan must have a regular schedule for payment of principal and interest and fees paid by the borrower can’t exceed 3% of the loan amount and monthly payments can’t exceed 43% of the borrower’s gross income.
The new rules “will continue to slow the momentum of improvement ” in the housing market, says Miller. The hope, of course, is that the new regulatins will help protect the financial system from a crisis like the one in 2007-2008.
These new rules will also impact Fannie Mae (FNMA) and Freddie Mac (FMCC), the government sponsored enterprises that are still the backbone of the mortgage market. They buy about two-thirds of new mortgages and bundle them into mortgage-backed securities for sale in the secondary market. Fannie & Freddie will buy only mortgages that meet most of the QM criteria.
In addition, Fannie and Freddie are raising the fees they charge mortgage lenders in exchange for guaranteeing new loans. The increase will make Fannie & Freddie-backed loans more expensive.