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Five Major Threats to the Housing Market

02/13/2015

According to numerous economists, analysts, and housing experts, recovery of the housing market in 2015 should make significant strides. While this is great news, there are several factors that could create threats.

Five Primary Housing Market Threats

1. The first potential threat is major investor cash out. One reason the housing market has started to turn around is because institutional investors bought hundreds of thousands of properties that were then turned into rental units. However, with home price increases and significant investment gains slowing down, some landlords want to cash out. Those investors now have a great opportunity due to price appreciation.

2. Another possible threat is that fewer foreigners are making real estate purchases in the United States, as reported by Realtor.com. Chinese buyers are still strong but there is a definite weakening among buyers from Russia and Europe, typically countries with struggling economies. This trend in real estate is already being seen in California, with the number of sales falling by roughly 25 percent.

3. Something else to think about is that current income is not keeping up with the cost of homes. Although unemployment is down and income is starting to increase, there remains an imbalance. Therefore, some buyers might have a difficult time affording a home within a desired area of living. Regarding this scenario, income levels are not increasing fast enough and for home ownership, affordability is becoming a real challenge.

4. There is also a risk level pertaining to lenders. Because of the housing market crash, many lenders are still skittish when it comes to making mortgage loans. In spite of lending standards recently being loosened by both Freddie Mac and Fannie Mae, a lot of lenders are not going to be as lenient. The other aspect of this is that if someone had a home foreclosed on during the housing market crisis, overcoming a damaged credit history will be tough.

5. The last major threat to the housing market that experts are watching is a dramatic increase in mortgage interest rates. Currently, rates are at all-time lows, which is great news for potential buyers and the Federal Reserve Bank has stated time and time again that they do not plan to increase rates for a “considerable time” but, Fannie Mae believes the benchmark rate could increase higher than expected.

Conclusion

If the Federal Reserve Banks decides to increase mortgage interest rates, the housing market could be seriously impacted, as indicated by Market Watch. For example, if interest jumps to 6 percent, some residential buyers in higher priced markets such as San Jose, San Francisco, and Los Angeles, California for example, would pay over 50 percent of income just toward the mortgage loan. To prevent sales from slowing dramatically, the only viable solution would be for home prices to drop.

Without question, there are some issues that need to be closely monitored in 2015 but for the most part, experts agree that not only is recovery going well now but it should continue to do well throughout the year.

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