4 Reasons the Housing Bubble May Pop in 2014

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Mortgage Bankers Association To Release Weekly Mortgage Market Index June 12
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The housing rebound is on a roll. Home prices continue to inch higher, and the number of indicators showing economic improvement suggest we'll enjoy an even rosier 2014, when the Fed won't have to do quite as much to keep the good times going.

However, there are also more than a few hints that in the year ahead, the housing market's rebound may take a breather -- or we may experience something far worse. Let's take a look at some of the warning signs.

1. Mortgage Rates Are Moving Higher

The economy's gradually getting on track, and that has resulted in interest rates inching higher. Naturally, the higher the rate, the less bang potential homebuyers get for their bucks.

There's little reason to expect this trend to reverse. The Fed recently announced that it's ready to begin tapering its rate-suppression plan by reducing its bond purchases by $10 billion a month. Easing up on this latest round of quantitative easing -- QE3 -- will have an impact on interest rates. After all, if the Fed's $85 billion in monthly bond purchases created the illusion of demand, what will the reduction do to the real demand?

In other words, interest rates for a range of investments are likely to continue inching higher in the year ahead. There's a reason why savvy investors have been pouring money out of bond mutual funds in recent months as higher rates result in lower bond prices.

2. It's No Longer House-Hunting Season

The National Association of Realtors has reported three consecutive months of declines in existing home sales.

Housing bulls will argue that the market is still strong. The association representing real estate professionals still expects 5.1 million homes to be ultimately sold in 2013, and that's the highest tally since 2007. Is that worth bragging about? Is it merely a coincidence that 2007 was when the last housing bubble popped?

Either way, the last several months have not been kind, and that's enough to kill any of the favorable momentum the market experienced earlier in the year when rates were bottoming out.

3. The Mortgage Market is Starting to Dry Up

With homes getting more expensive and interest rates getting higher, you might expect interest in buying to dry up, and that's exactly what's been happening.

Weekly home mortgage applications have fallen to their lowest level since late 2000. The spike in rates has killed off refinancing applications, but loans for home purchases are also starting to slump according to the Mortgage Bankers Association.

That certainly isn't a good sign for a housing market where a rebound in prices needs a fluid mortgage market to keep sales coming at a reasonable pace.

4. Home Builders Are Getting Greedy

All of these factors would seem to be warning signs for developers, but they don't seem to be heeding the cautionary signals. Housing starts are soaring as U.S. home builders broke ground on new homes last month at the quickest pace in five years.

It's easy to see why the builders are getting more aggressive given the rising home prices, but who is going to pay for these new digs in 2014?

In its latest quarter, luxury home builder Toll Brothers (TOL) reported that the average price of its new homes clocked in at $703,000, a whopping 21 percent ahead of what it was charging a year earlier. However, there's a "Toll" to be paid for this sort of behavior in the market. Orders for new Toll Brothers homes fell by 10 percent during the quarter.

Toll isn't the only developer experiencing a slide in orders. So what will happen after all of the new construction that's underway hits the market next year?

The housing market bubble may not pop in 2014, but it's highly likely that it will lose some of its sudsy essence.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

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vlady1000

Where I live they are still about 20% below the peak. (2007). Where 90% of my investment properties are located, they are up about 40-50% from 2007 (they never went down). ONLY 7 miles away from those (the other 10% of investment properties), they are still down 40% from the peak. Just shows you how local RE is.

January 01 2014 at 6:37 PM Report abuse rate up rate down Reply
Ed

I can go along with what is said in the article. In most families two people have to work to make ends meet. Many workers have experienced reduced hours and stagnant wages. From a recent survey I read 74.2% of the population make under $50,000 a year. In the new year many people are spent from the holiday. With rising medical care costs and Obama Care coming on line this all spells diaster for the housing market.

January 01 2014 at 5:54 PM Report abuse rate up rate down Reply
attyclientpriv

Age has made the understanding of signals more accurate. For example, I now look at events as weather transactions. If the sky is darkening in the middle of the day, well that is an indication of a change in weather; if there is a lightning bolt on the horizon, that is an indication of a change in weather; and when it starts raining, well you know the weather changes. These were the signs that people (a majority of people) missed in the last real estate collapse. What happened? What were the weather signs? Easy money was sign No. 1. That does not exist today... money is hard to get. Fraud in lending was sign No. 2. While this does exist today, it is way more limited than in the past. For example banks are closing their own loans - title fraud is down. Banks are lending directly - mortgage fraud is down. Speculating on real estate was sign No. 3., i.e., real estate became the dog track. Well, there is a little of this happening today; but it's only one sign which means I don't see the real estate market collapsing. On the other hand, the stock market will go through a serious correction. Can you see the signs? Do you see the weather? When you see lightning you know you are about to loose some serious stock value. If you are older than 65 you may not have the time to sit around and wait for the value of stocks to rise or go back up which means you will suffer a loss when the correction occurs. If you are in the 40's or early 50's in terms of age, well you can loose and wait for the rebound. What does it all mean? Older people have to move to more conservative equities, take way lower risks than younger investors. In the end, don't think of the real estate market like the dog track and definitely do not think of the stock market as a race track or casino. These are the rules of long term survival in the financial world. Happy New Year to all.

January 01 2014 at 5:09 PM Report abuse rate up rate down Reply
hsstempe

watch interest go up when and IF the feds can hold onto the reduction of 80 plus billion per month iin the bond market or.........or after the "seasonal" adjustment in part time employees shows up in the figures...straight upward...how about the feds count those off unemployment becuz we shipped everything overseas.......what crap!
the original old man kennedy said it 70 years ago, Big Busiess will screw you any chance it gets! Period! Cash is King!

January 01 2014 at 3:46 PM Report abuse rate up rate down Reply
Tom Harrell

"REMEMBER"-------The Banks and Lenders go DEregulated in 1999 and 2000 and it led to the Greatest BUST since HOOVER. -----------It's 2014 and the Banks and Lenders are STILL DEregulated and their starting the SAME practices that led to the Last Bust in 2005 and 2006.

In 2016, we're liable to be talking about the Big BUST of 2014 & 2015 and Wondering how Long THIS ONE is gonna last.

January 01 2014 at 3:02 PM Report abuse +1 rate up rate down Reply
Tom Harrell

Prices are Not being determined by the Market demand. They're being determined by the Builder and Financiers Manipulation. A 21% increase in Prices is OBSCENE especially since the Average Increase (up to the time of the BUSH Markets) was 2 to 3 % per Year.--------------We're not headed for another Bubble. We're headed for another "BUST" !

And this time it's gonna be WORSE because we haven't gotten Past the Last one YET.

January 01 2014 at 2:51 PM Report abuse rate up rate down Reply
Hi Den

When this bubble pops, it will probably blow the hot air out of this stock market bubble as well.

January 01 2014 at 2:18 PM Report abuse -1 rate up rate down Reply
jhrooney

The author laments "Higher Interest rate," who is he kidding? I guess he doesn't remember about 20 years ago where 6.38% was great.
Buyers that spend every last cent for the biggest house are going to get killed again unless they lock in a fixed rate.
A buyer who cannot afford at least a full percent above what the rates are now should not be in the market in the first place.

January 01 2014 at 12:02 PM Report abuse +4 rate up rate down Reply
dd1820

Home builders here have been greedy FOREVER....but now they think that the "new builds" here are worth FAr more than they are..they will Kill the Tucson markeft again ALL by themselves without any help from the FED.............They have even gone back to the outrageous practice of "lot premiums" again................you guys are MORONS..............

January 01 2014 at 11:16 AM Report abuse +2 rate up rate down Reply
Iselin007

Don't get old! It's your fault said the chief finance officer of that pro New World Order!

January 01 2014 at 9:30 AM Report abuse +1 rate up rate down Reply