Trouble Ahead For Housing In 2014?

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Includes: FMCC, ITB, PKB, XHB
by: Profit Confidential

by Michael Lombardi, MBA

Will the gains that the U.S. housing market made in 2012 and 2013 continue into 2014? As you’ll read below, the biggest threat to the housing market is moving in the opposite direction—against housing.

Sure, the Case-Shiller S&P Home Price Index, which tracks prices in the U.S. housing market, shows an overall increase of 13.6% in home prices in the first 10 months of 2013 (see the chart below).

Click to enlarge

Chart courtesy of www.StockCharts.com

But for growth in the housing market to continue, you need favorable market conditions for buyers. Unfortunately, the “favorable” conditions of 2011 through to 2013 are now becoming “unfavorable.”

Interest rates on mortgages are rising sharply. In November of 2013, the popular 30-year fixed mortgage rate tracked by Freddie Mac (OTCQB:FMCC) stood at 4.26%. In the same period a year ago, this rate was only 3.35%. (Source; Freddie Mac website, last accessed January 3, 2013.) The interest rate on the standard 30-year fixed mortgage has gone up 27% in twelve months. And the higher mortgage rates go, the more the affordability for homebuyers declines.

But rising interest rates are not the only factor weighing against the housing market in 2014. Adjustable-rate mortgages (ARMs), which virtually disappeared after 2007, are making a big comeback. According to DataQuick, in November of 2013, about 11% of all homes in Southern California were bought using ARMs. This has doubled in the area from the same period a year ago. (Source: Los Angeles Times, January 1, 2013.) ARMs have a fixed interest rate for a certain period of time, and then rates on the typical ARM adjust to market rates. What will happen to all those homebuyers who purchased houses using ARMs over the past three years as interest rates increase? They will have added monthly costs—that’s what will happen.

Any softness for the U.S. housing market at this point will spell disaster for an already delicate U.S. economy. I’d be weary of the housing market recovery in 2014.