2014 homebuying barriers

1/31/2014 9:15:00 AM

Amid rising home prices and interest rates, first-time homebuyers and move-up buyers are faced with a few upcoming housing barriers in 2014.

New homes
While 2013 was generally a positive year for the housing market, new home sales were outweighed by the transactions of existing homes. According to a recent report by the National Association of Homebuilders, new home sales were down 7 percent in December, falling from initial projections of 458,000 units to 414,000. Compared to 2012 however, new home sales were up 16.4 percent. The decline at the end of the year could indicate that more new homes will be sold in 2014.

"December's decline in new-home sales follows elevated levels in the previous two months and means the fourth quarter was still much stronger than the third," said NAHB Chairman Rick Judson. "While we expect sales to gain strength in 2014, builders still face considerable constraints, including tight credit conditions for home buyers, and a limited supply of labor and buildable lots."

For first-time homebuyers, new homes represent a particularly difficult purchase. CNBC reported that new homes are typically more expensive than existing homes, requiring mortgages with higher loan amounts - often jumbo loans exceeding $417,000 - with higher down payments. Nationally, home sales were up for 2013, but the same trend did not carry over to new homes. A large portion of home sales were from investors making purchases with all cash.

"New homes are very unlikely to be sold to an investor, the leading cause of high cash sales of existing homes," David Crowe, chief economist with the National Association of Home Builders, told CNBC. "And, new homes typically cost more than existing homes, making cash an even harder hurdle."

Mortgage market
From a year ago, mortgage rates have risen about 1 percent. Since the Federal Reserve's announcement that it would begin tapering stimulus spending, mortgage rates are expected to rise above 5 percent. While rates are significantly higher, they are still low by historical standards and most housing markets are still affordable for buyers. Borrowers will be able to get approved for a low cost mortgage in 2014.

"Consumers are getting used to more realistic mortgage rates, which still remain favorable on a historical basis," said Crowe. "As household formations and pent-up demand continue to emerge, we anticipate that 2014 will be a strong year for housing."

Other barriers to homebuyers include the recent tightening of credit standards. Since the recession, new lending practices have made credit requirements stricter in order to reduce the chances of a borrower falling into default and losing their home to foreclosure. Some of these changes include a lower debt-to-loan ratio, meaning that households cannot have too much debt owed compared to the amount of the loan. In addition, income standards have increased. Fortunately, most of these changes will protect borrowers in the long run and strengthen the mortgage market.

Contact the Federal Savings Bank, a veteran owned bank, to find out more about first-time homebuyer programs.