The government-sponsored enterprises are lowering their housing expectations for 2014, citing shrinking inventory and tightened credit standards among other reasons.
Freddie Mac lowered its forecast for home sales to 5.5 million, down about 100,000 sales from the prediction at the start of 2014.
(New home sales data for March will be released Wednesday. HousingWire will have the report soon as it drops.)
“Tight inventory may pose a significant challenge for home buyers in many markets across the country, which may result in higher home prices and sales being lower than expected,” said Freddie Mac chief economist Frank Nothaft.
Doug Duncan, chief economist for Fannie Mae, says he now believes that new-home construction will hit 1.5 million housing units this year, which is 50,000 fewer than the original forecast from the start of 2014.
“We have downgraded our housing forecast slightly due to a lackluster sales picture,” Duncan said.
Digital Risk's CAO Tom Showalter says that the market is currently experiencing friction as a result of economic factors like rising home prices, stagnant income levels, and investor participation in the marketplace, and that this friction will keep the housing market from revving up in 2014.
"You know what happens in an engine when you get too much friction and the car just doesn't rev as fast? It’s one of those friction-based arguments rather than a 'catastrophic change' based argument. What I’m saying is that there is so much friction here; the friction from the regulators, the friction from the lenders, friction from the borrowers (median incomes aren't going up, coming up with down payments are tough, they aren't sure the house is priced correctly) every one of those reasonable propositions is a source of friction," Showalter said.
This friction in the market is shrinking retail appetite, as investor demand slows.
"What I’m seeing is that the investor is exiting and now you have to start seeing the influx of the retail buyer. The investors are gradually leaving the market as prices rise, and the retail buyer is waiting in the wings. There are some markets, like Miami and San Francisco that are driven by outside factors, but markets like St. Louis and Omaha and parts of California and Nevada that aren't driven by structural factors that are unique and powerful, they are going to suffer the friction as the retail buyer struggles to get back into the marketplace," Showalter said.
Showalter notes that "as they get into this excessive friction situation, where in a normal environment for every 10 people that are thinking about doing a deal, where the normal turn rate is 6 in 10, the turn rate becomes 3 or 4 in 10. This is what’s happening in the country, we are making the average home seller nervous, the average home buyer nervous."
While this stress on the market will likely slow growth in the coming quarters ahead, Showalter notes that there will be no major collapse.
"I don't see things dropping off a cliff like it did when the meltdown occurred because this is a different kind of problem. It will be so hard to get it to climb at a high rate – because there is just too much drag," he said.
There is some upside, however.
"One thing I do see happening as the prices start to drop and as median incomes don't necessarily drop is that you are going to see the affordability index start to go up. So more people will be able to buy a home, the question is how many fish will bite on that bait," Showalter said.