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The growth of housing markets has been slow but steady following the collapse of the housing bubble in 2008, and experts predict strong, but not explosive, increases in home sales and new construction. The market showed many signs of turnaround in 2013, with home values slowly increasing, fewer new foreclosures and fewer foreclosures sitting on the market. However, the number of new mortgage applications fell late in the year along with new home construction, suggesting much of the growth in 2013 came from real estate investors rather than families.

Stable market

Online home sales website Zillow.com reported on the changing market. Zillow’s Chief Economist Dr. Stan Humphries said many factors contributed to the improvements in the housing market in 2013. “The pace of home value appreciation has leveled off and is beginning to slow down, after peaking [last] summer. Much of [2013’s] rapid growth in home values can be attributed to very strong demand, as low mortgage interest rates, relatively low home prices and a slowly improving economy helped draw buyers into the market,” Humphries stated in a December press release.

Demand has been strong, and many economists believe new construction will help meet the demand, along with rising equity in homes prompting some homeowners to sell.  New construction is better for the overall economy than existing home sales by boosting sales of building materials and providing jobs.

Humphries said he doesn’t expect volatility in the real estate market in 2014, but, instead, foresees a level and steady arena. “[Last year’s market] dynamics are now giving way to more moderating influences, including rising mortgage interest rates, flagging investor demand and slowly increasing for-sale inventory. This slowdown in home value appreciation will contribute to a more balanced market and will help to ease some emerging affordability problems in a handful of very hot markets—particularly in California.”

Home prices growing

In the last quarter of 2013, a survey conducted of 110 economists by Zillow yielded an average forecast of 4.3 percent growth in the home prices for 2014. Humphries predicts a 3 percent growth rate, down from 5.2 percent last year through October. Real estate website Trulia reported the asking price for homes rose by 11.9 percent in December.

An increase in home prices may discourage new buyers, but it is good news for anyone looking to sell or for those holding an underwater mortgage. By February of 2012, about 26 to 27 percent of homeowners (depending on the source) were estimated to have negative equity in their homes. By December, RealtyTrac, an online marketer of foreclosures, reported the figure to be down to 19 percent, a significant drop from September’s rate of 25 percent.

The National Association of Realtors reported home values were up by 12.8 percent by October 2013 over the prior year, but expects that rate to slow by 6 percent this year. Because investors dominated the housing sales of 2013 and the foreclosure rate has fallen, a slowing down of investment activity could keep new sales in 2014 from being energetic.

Mortgage availability

Shaky lending practices by banks providing mortgages to buyers with low qualifications contributed to the crash of housing bubble in 2008, and the overall economic downturn caused job losses which led to waves of foreclosures. These and other factors caused banks to become more miserly with new loans. Some economists predict lending standards will loosen up slightly in the coming year, although federal laws enacted stricter standards for loans originated through mortgage-backers Fannie Mae and Freddie Mac. The Mortgage Bankers Association conducted a poll which suggests the desire for banks to lend may exceed the number of potential buyers, which may prompt banks to find ways to lure more buyers by easing standards.

Interest rates on the rise

Mortgage interest rates are expected to rise in 2014, so new home loans will be more expensive for many buyers. The Federal Reserve Bank has announced it is likely to pull back on economic stimulus measures as the unemployment rate goes up, which will lead to an increase in interest rates. Rates have been slowly climbing, currently around 4.4 to 4.7 percent—up from about 3.4 percent this time last year but similar to 2011 rates.

Humphries expects mortgage interest rates to reach about 5 percent, and the Mortgage banks Association concurs. The National Association of Realtors sees 5.4 percent in the future. Higher interest rates could discourage new buyers, or could prompt some buyers who have been waiting to finally take the plunge.

View the best mortgage interest rates available now. Current refinancing rates are available here.

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