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California housing market poised for future growth

But fiscal, housing policies leave cracks in market confidence

california

The California housing market will continue to improve in 2014, with sales expected to shift toward primary homebuyers and both sales and home prices posting further gains.

However, the Golden State is at risk of facing an economic wildcard heading into 2014, particularly when it comes to monetary and housing policies, the California Association of Realtors claims in a new report.

The mortgage market is cautious as the Federal Reserve continues to map out its plan to wind down its ultra-easy monetary policy, inevitably impacting the housing market.

The market was shocked when the Fed decided to continue purchasing mortgage-backed securities at a monthly pace of $40 billion a month, indicating the economy isn’t ready to lose its lifeline just yet. Now, market experts are predicting the Fed will begin tapering its quantitative easing program in December.

Additionally, the debate on government-sponsored enterprise reform continues to cause heated tension on Capitol Hill.

As Congress returned to their seats last month, analysts expected more mortgage finance reform chatter, but the government shutdown and looming debt ceiling took over the spotlight.

Regardless of the national headwinds, CAR expects home sales to gain 3.2% next year, reaching 444,000 units, up from the projected 2013 sales figures of 430,300 homes sold.

"The housing market has improved over the past year, and we expect this trend to continue into 2014," said CAR president Don Faught. 

He added, "As the economy enters the fourth year of a modest recovery, we expect to see a strong demand for homeownership, as buyers who may have been competing with investors and facing an extreme shortage of available housing return from the sidelines."

Meanwhile, the average 30-year fixed mortgage rate is expected to rise 5.3%, while still remaining at historically low levels, NAR noted.

Additionally, the median home price will increase 6% to $432,800 in 2014, following a projected 28% increase to $408,600 in 2013.

"We’ve seen a marked improvement in housing market conditions in a year with the distressed market shrinking from one in three sales a year ago to less than one in five in recent months, thanks primarily to sharp gains in home prices," said CAR vice president and chief economist Leslie Appleton-Young. 

She added, "As the market continues to improve, more previously underwater homeowners will look toward selling, making housing inventory less scarce in 2014."

It’s important to note though that housing price appreciation will have to moderate further to stay affordable and avoid another housing bubble.

The combination of higher rates and the rise in home prices to almost near pre-crisis levels have pushed mortgage burden over 33% of borrowers’ monthly income, explained NewOak CEO and co-founder Ron D’Vari.

"Assuming other factors stay the same, the increasing household formation and increasing supply due to new construction will keep demand and supply of homes in balance," D’Vari concluded. 

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