Following a year of fast-paced appreciation, Fitch Ratings expects home price gains to slow to a more moderate pace in 2014 in the United States, according to its Global Housing and Mortgage Outlook released Tuesday. The ratings agency also predicts mortgage volume will decline and delinquencies and shadow inventory will decrease, albeit slowly, while liquidation timelines continue to rise.
Home prices will continue to rise on the winds of “market momentum, the effects of inflation, the improving economy, and a return of buyers attracted by signs of stabilization,” according to Fitch.
However, rising mortgage rates and increasing inventory will temper price gains this year, the ratings agency said in its report.
At a national level, prices are about 15 percent overvalued, according to Fitch. A few markets in western states are leading this trend with home price growth outpacing income and other economic factors. For example, price-to-rent and price-to-income ratios in San Francisco have risen almost 25 percent since early 2012, Fitch explained.
Because of these trends, “Fitch remains concerned about regional overvaluation,” the ratings agency stated in its report.
While affordability remains high overall, Fitch says affordability will slip somewhat this year. One contributing factor is rising mortgage rates, which will likely reach 5 percent in 2014, according to Fitch’s predictions. The ratings agency says rising interest rates will also contribute to “a substantial decrease” in lending this year.
Prepayments will “remain at lower levels than historical averages for the next several years” as interest rates rise and refinances become less favorable, according to the ratings agency.
On the other hand, purchase loans will grow over the next few years, Fitch said, adding that the government will “continue to dominate market issuance through Fannie Mae and Freddie Mac.”
Although “a return to historic levels of arrears is not expected in the near future,” Fitch noted that recently-originated loans are performing strongly.
Long liquidation timelines, especially in judicial states, mean today’s shadow inventory will be slow to dissipate. While the industry’s shadow inventory will continue its current pace of decline for several years, Fitch says it will take about five years to work through the current volume of homes that make up the shadow inventory.
Housing starts have begun to pick up, and Fitch expects them to continue to rise, but they will be vulnerable to price corrections.
While U.S. prices will continue to rise this year, Fitch expects home prices in its northern neighbor to remain flat or fall slightly. This is due to Canada’s “cautious lending policies driven by government measures,” the ratings agency explained.
Fitch harbors a mostly favorable outlook for the housing markets in all 17 countries covered in its Global Housing and Mortgage Outlook.