Why the U.S. Housing Market Is Headed for Trouble in 2014

The 2014 U.S. Housing Market Recovery That Never HappenedCompared to the past two years, the U.S. housing market will not have a great year in 2014.

In fact, key indicators are now pointing to a top in the housing market recovery:

The National Association of Home Builders/Wells Fargo Housing Market Index fell to 47 in March, coming down more than 16% from 56 in January. (Source: National Association of Home Builders, March 17, 2014.) When this index is below 50, homebuilders view housing market conditions to be poor. This tells me that those who are closest to the housing market—the homebuilders—are becoming concerned.

And existing-home sales are declining. Existing-homes sales in the U.S. housing market fell 7.1% in February from a year ago and registered at the lowest pace since July of 2012. January’s existing-home sales were disappointing, too.

The backbone of any housing market recovery, first-time homebuyers continue to be absent from the recovery. The president of the National Association of Realtors was quoted as saying, “The biggest problems for first-time buyers are tight credit and limited inventory in the lower price ranges… In our recent consumer survey, 56% of younger buyers who took longer to save for a down payment identified student debt as the biggest obstacle.” (Source: “February Existing-Home Sales Remain Subdued,” National Association of Realtors, March 20, 2014.)

(At least he didn’t blame the poor weather conditions as the reason homes sales declined in February!)

Sadly, potential home buyers have more troubles coming their way, as interest rates are expected to rise. Between February of 2013 and February of 2014, the 30-year fixed mortgage rate, tracked by Freddie Mac, has increased by 22%, from 3.53% to 4.30%. What happens if mortgage rates go up to five or six percent as they were in 2007? Home buyers will run further away from the market because homes will become even more unaffordable for them.

With homebuilders’ confidence plunging, demand for homes declining, and home buyers facing rising mortgage rates, the real estate market is in for a weak 2014, possibly even a contraction.