Opinions abound as to the future stability of the housing market and whether there is another housing bubble; however, most forecasters agree that certain factors should be assessed in forming your opinion. Those factors which affect the market most are interest rates, price, wages, taxes and cost of living, inventory, and demographics.
Interest rates are at an all time low since the housing bubble burst and the recession hit. The federal government implemented the stimulus plan in order to help the economy stabilize. As this stabilization takes effect, and the recovery continues, the FED will eventually taper off the stimulus program and raise interest rates. We saw this briefly in the 3rd quarter of 2013, when the FED announced they would begin raising interest rates. The momentum of the market stalled, and the FED quickly renounced that intention. However, as the economy strengthens, unemployment rates decline, and job growth increases, the inevitable will eventually happen, and interest rates will slowly climb into 2015. Predictions range near 6% towards the end of 2015, and thus prices will either level or drop depending on the increase.
With historically low interest rates and inventory, prices skyrocketed in parts of the country, specifically major metropolitan areas. This in turn caused certain would be buyers to drop out of the market due to lack of affordable homes for the lower and middle income brackets. This trend is further propagated by an increase of new development in the luxury sector primarily. However, there is still a significant portion of homes which are bank owned that are unable to be released to the public due to government restriction on the banks. Once the government relinquishes control of these REOs and the market is flooded with more inventory, home prices should decline.
As the prices rise, so do the taxes, which puts additional strain on the average Joe homeowner to maintain their monthly housing expense. In addition to taxes, the cost of living greatly effects the housing sector. If the cost of gas suddenly rises to a high percentage, the number of foreclosures will increase too. Current indicators show that inflation has leveled, despite signs of increase earlier this year.
Another indicative factor of the health of the market is earnings or wages. Although we see continued job growth, the positions being created are in the low income bracket, and hence, overall average wages are falling. This is reflected in proposed demographic models which show trends for a lower skilled and lower paid population over time.
So what factors that will insure a stable housing market? Higher wages, smaller monthly payments achieved through a 50 yr model, easier qualifications for lendees and more efficient construction to name a few.