The housing market slowed considerably in 2014 after several years of impressive growth, but it appears (for now) that the recovery remains alive and well. Fewer homes are entering foreclosure as in recent years, and prices seem to have stabilized.
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However, some things could still derail the housing recovery. Here are three examples from our analysts.
Todd Campbell: Stagnant wages pose one of the major threats to the U.S. housing market. Despite private-sector job growth having recovered since the end of the recession,wages have made little progress. After adjusting for inflation, average real wages have edged up a paltry 0.7% in the past five years.
That's not going to cut it. If housing starts are going to accelerate again to the pre-recession average, American workers must feel flush enough to apply for mortgages, and banks will need to feel confident enough to say OK. That is not likely to happen unless consumers can bolster their personal balance sheets by socking away disposable income and paying down credit cards. According to a summer 2014 survey from Bankrate, roughly a quarter of Americans did not have any emergency savings, and those least likely to have such savings were people in the prime home-buying ages of between 30 and 49.
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The outlook, however, is not all bleak. A recent Glassdoor study suggests workers are increasingly confident about their employment and more willing to demand pay increases. Based on the fact that real wages increased by 1.7% year over year in December, though, that does not yet appear to betranslating into higher paychecks.
Matt Frankel:One thing that could put a stop to the housing recovery is if mortgage rates rise too fast. For example, a rate hikefrom 4% to 5% on a $200,000 mortgagewould add an extra $118 (or a 12% increase) to each monthly payment.
As the Federal Reserve has kept its rates extremely low in recent years, mortgage rates have remained at historically low levels. In fact, the average 30-year mortgage rate is well below 4% as I write this.
Higher mortgage rates can cause home sales to plummet. The chart above shows thatrates (the blue line) spiked considerably in late 2010. A few months later, home sales dropped, and they didn't really begin to pick back up until rates dipped below 4%. More recently, rates spiked rapidly in the second half of 2013, causing the pace of home sales to drop considerably again.
(Note: There are a few months between a rate spike and the drop in home sales because of the time it takes to close a mortgage. Generally, rates are locked in for one to three months before the home actually sells.)
With the Fed widely expected to begin raising rates in 2015, be on the lookout for mortgage rate spikes, which could cause home sales to grind to a halt.
Dan Caplinger: Most housing market analysts are focusing on the impact of a likely rise in mortgage rates, as Matt pointed out. Yet one component of the recent housing boom that has gone largely unnoticed is the impact of international buyers on the U.S. real estate market. With the strength of the U.S. dollar, many foreign investors are looking to diversify their holdings beyond their home countries and taking advantage of relatively low real estate costs. Moreover, by maintaining assets beyond the reach of their home jurisdictions, foreign investors protect themselves against expropriation and other dramatic moves by authoritarian governments.
Eventually, economic conditions in Europe, Japan, and emerging markets should improve, catching up with the U.S. and making home markets look more attractive again. When that happens, capital could flow out of the U.S. as quickly as it came in, and that in turn could put downward pressure on home prices. That would be good news for some buyers who have been priced out of expensive real estate markets due to international interest. But for homeowners and would-be sellers looking to maximize the proceeds from their home sales, an exodus of international real estate investors could be the unexpected catalyst that would derail the recovery in the housing market.
The article The 1 Thing That Could Derail the U.S. Housing Recovery originally appeared on Fool.com.
Dan Caplinger has no position in any stocks mentioned. Matthew Frankel has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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