2013: Five Things to Expect from the Housing Market

Five Things Consumers Should Expect From the Housing Market In

Stan Humphries

December 26th, 2012

In 2012, the national housing market finally turned a corner. We’ve now experienced 13 straight months of home value appreciation. Sales were up significantly over 2011 as buyers returned to the market, boosting demand.

So what will 2013 have in store? Here are five things
consumers can expect to see in the housing market next year:

Up, Up and Away

The national housing market hit bottom in
October 2011, and home values have since risen 5.3 percent from that trough.
The most recent Zillow
Home Value Forecast
calls for 2.5 percent appreciation nationwide from
November 2012 to November 2013.

According to a recent Zillow survey of more than
100 economists and analysts, respondents predicted home values (based on the
S&P/Case-Shiller U.S. National Home Price Index) to rise 3.1 percent in
2013, on average.

Most markets covered by Zillow’s
Real Estate Market Reports
have already bottomed out, with only 10 of 255
covered metro areas not projected to hit a bottom within the next year.

Bottom Line:
Homeowners looking to sell in 2013 can largely rest assured they won’t be
selling at the bottom, and
many will find themselves in a sellers’ market
. Potential buyers in 2013
may be more motivated to get a deal done while affordability is still extremely
high and mortgage rates continue to be historically low.

Real Estate Is Local Again

According to the Zillow
Breakeven Horizon
, buying beats renting when staying in the home for three
years or more in roughly 60 percent of U.S. metros. The areas where it might
make more sense to buy (if you’re planning on staying for three-plus years) are
clustered in the Southwest and Southeast. If you won’t be staying put for at
least a few years, consider renting in the Northeast, where buying often
doesn’t make more financial sense until five years or more.

The goal of Zillow’s
Buyer/Seller Index
is to determine where buyers have the most leverage in a
sale, and where sellers might have the upper hand. In general, we determined
that metro areas in the West and Southwest ­ including the Bay Area, Las Vegas and Phoenix ­ are strong for sellers.
Metros in the Midwest and Mid-Atlantic ­ places such as Chicago, Cleveland and Philadelphia ­ are best for

Bottom Line: The
housing market recovery has remained true to the old real estate axiom of
“location, location, location.” How your local market is faring today ­ and if
it makes more sense to buy or rent, to sell now or to hold off if possible ­ is
largely determined by unique, local factors and fundamentals. Arming yourself
with timely and comprehensive local market information is good advice at any
time, but will be even more important in 2013 as buyers continue to seek
bargains and sellers look to maximize returns.

Coming Up for Air

In the third quarter of 2012, the percentage
of homeowners with a mortgage in negative equity ­ or “underwater,” owing more
on their mortgage than their home was worth ­ fell below 30 percent for the
first time since Zillow began tracking that data using an improved methodology
in early 2011.

Still, 28.2
percent of homeowners with a mortgage remain underwater
. Because underwater
owners have a far more difficult time selling their home, a large number of
homes that otherwise might end up on the market aren’t getting listed. As a
result, inventory in many areas is incredibly tight, leaving buyers to fight it
out amongst themselves, which in turn can help drive up prices. This, among
other factors, has led
to tight inventory in many of the hardest-hit cities around the country

Bottom Line: As home
values continue their upward march in 2013, more homeowners currently trapped
underwater will begin to surface. This will be good for buyers exhausted by
limited inventory and intense competition in markets such as Phoenix and Miami,
but it will also have the effect of cooling price increases. As a result, in
2013, we predict home value appreciation in many areas will look more like a
series of steps, characterized by cycles of price spikes and plateaus. Price
spikes will free some homeowners from negative equity, allowing them to sell,
thereby easing supply constraints and dampening prices until the cycle is

Historically Affordable

interest rates have been hovering at or near historic lows for the past year
and the Federal Reserve has taken concrete steps to ensure they stay low for at
least the foreseeable future.

At the same time, home values ­ while
recovering nicely ­ still have a long way to go to reach their pre-bubble
levels. Overall, national home values in November were still down 19.4 percent
from their peak in May 2007, according to Zillow.

Bottom Line: Between
1985 and 2000, Americans spent, on average, about 20 percent of their household
income on mortgage payments. That percentage increased to more than 24 percent
by 2006, before falling to just 13 percent by the second quarter of 2012. If
you can qualify for a home loan
, the combination of low rates and low
prices means your home-buying dollar will continue to take you farther in 2013
than in recent years, even for buyers on modest budgets.

Mortgage Interest Deducted?

Changes to the mortgage interest deduction
(MID) may be a key element of any “grand bargain” reached by politicians in
order to avert the year-end fiscal cliff. If adopted, any measure to limit or
repeal the MID will result in some home price impacts over time and by market

Home values at the high end of the market
will likely be more negatively impacted by MID changes than home values
overall, according to a recent Zillow survey
of economists. For example, in the event that the maximum MID-eligible mortgage
amount is reduced from $1 million to $500,000 and the deduction allowance for
second homes is eliminated, the majority of respondents said they expect
high-end home prices to fall while U.S. home prices overall experience little
or no price impact.

Bottom Line: Real
estate lobbying groups have long fought against changes to tax rules allowing
for the deduction of mortgage interest, arguing that any changes will impact or
eliminate some of the historic financial advantages of owning a home. But
unless you’re buying a proportionally more expensive home or are buying in a
more expensive area, the impacts of MID changes will likely be muted. The
decision to buy or sell a home is highly personal and dependent on a number of
factors, only one of which is potential tax implications. In 2013, make your
decision to buy or sell based on your own informed opinion and your unique

Source: Zillow



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