The future of housing for 2014 looks a lot different – and a lot darker – than it did at the start of the year.

Either fundamentals have changed, or the evidence is getting so overwhelming that neither the most hopeful naiveté or calculating spin can cover it.

That’s not to say there aren’t bright spots, but marking the danger spots on the map is a lot more important than marking X on the buried treasure.

So here are five things to know about housing and where it’s going for the rest of 2014.

1) Luxury Sales Fly as Home Sales for the Rest Crash and Burn

Home sales among the 1%  look like they will beat last year’s numbers, and that’s about the only real bright spot in housing on the horizon, and the only thing looking positive for the rest of 2014.

Sales of the priciest 1% of homes are up 21.1% so far this year, according to Redfin. This follows a gain of 35.7% in 2013. Meanwhile, on the other side of the bridge, home sales in the remaining 99% of the market have fallen 7.6% in 2014.

It’s not that interest rates are usurious by any stretch. This is despite mortgage rates having dropped to their lowest level in more than six months. The 30-year, fixed-rate mortgage averaged 4.14% for the week ended May 22.

BlackRock CEO Laurence Fink said Tuesday that the housing market is “structurally more unsound ” than prior to the financial crisis due to its reliance on the government-sponsored enterprises of Fannie Mae and Freddie Mac.

"There are haves and have-nots, and the haves are the ones out buying," Redfin CEO Glenn Kelman said.

2) Real Estate Investment Highly Uncertain

Concerns still linger over the state of residential investment, which contracted in both the fourth quarter of 2013 and the first quarter of 2014, as well as prices being driven up by investors rather than homeowners, and the growing affordability gap for buyers. The weak labor market means that the recovery is tenuous. Weak job growth and wage stagnation remain challenges for both housing and for the economy in general.

Federal Reserve Bank of Cleveland researchers Edward Knotek II and Saeed Zaman say there are three primary factors behind the recent slowdown in residential investment: the increase in mortgage rates since early 2013; the unusually cold winter; and a modest tightening of lending standards in the residential mortgage market.

The weather reason doesn’t really fly. As CoreLogic’s (CLGX) reported, past severe winters that have affected housing starts negatively were followed by a rebound after temperatures began to rise again. This analysis indicates there should be a rebound again this spring, but it will not be sufficient to counteract the current weakness in the market, which can’t be blamed on the weather.

Knotek and Zaman say the resumption of more normal weather and ongoing improvements in labor markets and the broader economy should allow for a rebound in residential investment. However, the researchers also note that the experiences of the past year highlight the strong interest rate sensitivity of the housing sector.

3) Investor Price Increases Push Housing Out of Reach

Home prices in the United States are just 12.8% off the 2006 peak, according to the comprehensive March home price index report from Black Knight Financial Services.

April home price data from S&P/Case-Shiller released on Tuesday, found slight increases for the month. The 10-city and 20-city composites recorded miniscule rises for March 2014, increasing .8% and .9% month-over-month.

Separately, the Federal Housing Finance Agency House Price Index found that prices continued to trend higher in the first quarter, and increased for the eleventh consecutive quarter, rising 1.3% in the first three months of 2014.

Housing affordability is being skewed by cash investors (increasingly) and institutional buyers (less so than last year) which are still accounting for almost half of all home sales. Until there is affordability, there cannot be a rise in first-time buyer participation. Which brings us to the next point.

Click below for the rest of the story – Mortgage originations, Millennials, and where is the light at the end of the tunnel?

4) Millennials Want to Buy but Can’t

DoubleLine Capital founder Jeffrey Gundlach said he is concerned that would-be young buyers are shunning mortgages even though all the evidence shows they want to buy rather than rent. So far, returning homebuyers have dominated the scene in 2014 because too many first-timers are dealing with mounting debt.

“The deferral of marriage has such a staggering impact on real estate and I just don’t think people focus on it,” said real estate investor Sam Zell, 72, whose Chicago-based Equity Residential is the largest U.S. apartment landlord. “I don’t think the multifamily market has ever had a better set of future demographics.”

Zell said he expects the Homeownership rate to drop as low as 55% from the current 35-year low, as more people delay marriage.  

So what’s the good news? Now might be a good time to invest in apartments.

5) Mortgage Originations Fizzle

Mortgage originations are at their lowest level in 14 years and everyone is expecting that will only get worse as mortgage rates creep up.

Chris Flanagan, MBS/ABS strategist for BofA Merrill Lynch, said mortgage activity is going to underperform in 2014.

“We were expecting $1 trillion in gross issuance for the year (at the start of 2014.) We’re at about $200 billion now,” Flanagan said. “So we’re on track for $750 billion for the year, which is less than expected.”

He said credit remains a headwind for buyers.

“We came into this year knowing credit would be tight,” Flanagan said. “We hear anecdotal evidence that credit is loosening, but (when you consider mitigating factors to the anecdotal evidence) the end result is credit is still very, very tight.”

Flanagan said that while the FHA has lowered its threshold for FICO scores by 15 points, it hasn't translated into increased mortgage originations.

It’s happening across the board. Bank of America (BAC) reported that its first-quarter mortgage originations fell 65% year-on-year in its earnings report. Wells Fargo (WFC) reported record net income of $5.9 billion, up 14%, or $1.05 per diluted common share, for first-quarter 2014, where as JPMorgan Chase (JPM) recorded a first-quarter 2014 net income of $5.3 billion, a drop from $6.5 billion in the first quarter of 2013.

Lawrence YunNational Association of Realtors’ chief economist, noted in the most recent existing-home sales report from NAR, “Some growth was inevitable after sub-par housing activity in the first quarter, but improved inventory is expanding choices and sales should generally trend upward from this point. Annual home sales, however, due to a sluggish first quarter, will likely be lower than last year.”  

The housing market has improved since the financial crisis, but it’s not clear how strong that improvement is, given that so much of it is supported by intense government subsidies, protection and backstops.

Even Federal Reserve Chair Janet Yellen concedes that housing is no longer helping – it is hurting the economy.

“One cautionary note, though, is that readings on housing activity – a sector that has been recovering since 2011 – have remained disappointing so far this year and will bear watching,” she said. “Another risk – domestic in origin – is that the recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery.”

Further complicating matters is the conflict between regulatory pressures at cross-purposes – a push for an affordable housing mandate versus regulatory standards for debt-to-income ratios, QM mandates and so on.

That’s where things stand as the market crosses the halfway point on the calendar year.

Anthony Sanders, distinguished professor of real estate finance at George Mason University, sums up the problem by taking a step back from the details.

“True, credit is tighter than during the housing bubble, but average FICO scores on closed loans has been dropping,” Sanders says.“But the problem remains a slow recovery for the middle class in terms of employment and income. Of course, The Fed could speed up tapering and allow rates to rise (cutting off cheap funding sources to investors). As it stands, house prices are rising while affordability for the middle class is shrinking."

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