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24 MARKET ANALYSTS EXPECT HOUSING RECOVERY TO SLOW IN 2014 Research firm predicts the slowdown will bring several unexpected 'upsides.' e housing market's recovery is entering a new phase, according to the analysts at Capital Economics. ey say the rapid bounce in home prices seen this year, which was driven by inves- tors and tight supply conditions, will soon start to moderate. e next stage of the recovery, the firm's analysts predict, will be characterized by strengthening activity among owner-occupants and mortgage-dependent buyers, as well as a much more moderate pace of home price appreciation. Overall economic growth, on the other hand, will accelerate in 2014, according to Capital Economics, from around 1.8 percent in 2013 to 2.5 percent this year. e firm notes in its outlook report that monthly employment gains have already climbed back to the 200,000 mark. As the economy's fiscal drag fades, it should more than offset the impact of rising long-term interest rates, the company's analysts contend. e Federal Reserve announced in mid- December that it would begin tapering its asset purchase program in January, but Capital Economics says any further increase in long- term interest rates that results will be "modest." After all, the Fed is trimming its monthly buys of mortgage securities and Treasuries by just $10 billion. Officials strengthened the central bank's forward guidance to emphasize rates are not likely to rise for at least another couple of years. "And even if mortgage interest rates edge a little higher, the recovery in housing market activity should also continue," Capital Econom- ics said in its report. Higher mortgage interest rates have taken a toll on housing market activity already, but further rate increases will see the recovery slow rather than reverse, the analysts stressed. Sales activity initially dropped when rates spiked, but the latest data suggest this was a period of ad- justment rather than the start of a weaker trend, which fits with the fact that housing remains very affordable, they explained. "We envisage 30-year fixed mortgage rates end- ing 2014 at 5 percent and 2015 at 5.5 percent," it said in the report. ere may ultimately be an upside to higher rates, according to Capital Economics' analysts. is upside would come in the form of a quicker loosening in mortgage credit conditions now that lenders cannot rely on the refinancing boom to boost their profits, they suggested. e supply of homes for sale is now increas- ing, Capital Economics noted in its report. In addition, rising prices and a reduction in negative equity are bringing willing sellers back to the market. Alongside a reduction in the number of heavily-discounted distressed homes for sale, the firm says this will drive a sea change in the composition of supply and trigger a loosening in overall market conditions as buyer demand increases, according to Capital Economics. e rapid run up in house prices means that housing affordability has deteriorated over the past three months. But even though valuation and af- fordability metrics are becoming less favorable, the overall picture is still that housing is a good value and "on the cheap side," the firm said in its report. e National Association of Realtors' (NAR) affordability index suggests the typical U.S. household now has 166 percent of the income required to qualify for a mortgage on the typical home, down from 180 percent in Q 3 2013. is deterioration in mortgage affordability means that average mortgage costs are once again above average rental costs, which may deter some households from leaving the rental market for homeownership, according to Capital Economics. Still, the firm notes that "[o]ther than the past four years, at no point during the 40-year history of the NAR figures has housing been as affordable as it is now." Similar conclusions hold in terms of hous- ing valuations, Capital Economics explained, adding that the simplest valuation measure com- pares real house prices to their long-run trend level. On this basis, housing is 12 percent below fair value, according to the firm's analysts. at figure is down from 21 percent below fair value two years ago, but the analysts say even now, prices still have room to increase before worries about overvaluation become pressing. A second method compares house prices to disposable incomes per capita, and it suggests that housing was 14 percent undervalued in Q 3. A third valuation measure paints a slightly dif- ferent picture—the house price-to-rent ratio. On this measure, housing is at the fair-value mark. As the firm's analysts already noted, mortgage costs come in above average rental costs now. ey say it looks like home prices will be up by 11 percent for 2013 as a whole, which they ex- pect will "mark the peak for house price gains." Capital Economics' analysts predict "price rises will slow to around 4 percent per annum in 2014 and thereafter." Tami Rund TRund@AssetVal.com 970-256-6614 www.AssetVal.com Call Us Today! VALU-ations Providing reliable, responsive, scalable and fully customizable valuation solutions since 1995 Our Products Include: Residential and Commercial Broker Price Opinions Inspections Rental Data Reports Automated Valuation Models Valuation Solutions TM

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