There are two key factors that will dictate the direction of the real estate market in the coming year: interest rates and inventory.
Countless economists have weighed in on where interest rates will go in 2014, and while they vary on the subtleties of their predictions, the vast majority agrees that interest rates will go up. The good news is, that even though interest rates will continue to inch higher, historically speaking, they will still remain relatively and remarkably low.
So how will rising interest rates impact our local market? Given that prices are so high (historically speaking and relative to the rest of the country), even modest increases in interest rates will impact the affordability equation for many buyers. But not all buyers. Many in this area are able to pay cash or finance only a small portion of the purchase price of their home. For this segment of the population, the impact of modest interest rate increases will be negligible. I anticipate we will see slightly diminished demand as interest rates rise in 2014, but we certainly aren’t going to see demand dry up altogether.
On the supply side of the equation, there is the question of whether or not we will see housing inventory return to normal levels in 2014. The biggest challenge facing buyers in 2013 was low inventory. Essentially, demand greatly outpaced supply. With prices in this area steadily increasing over the past several years, the question is: Are prices now high enough to push would-be sellers off the fence?
These “would-be sellers” are staying put for many reasons. For one, many homeowners re-financed at incredibly low rates, and now that interest rates are on the rise again, it’s difficult to walk away from those rates. Another reason is low property taxes. Many of these folks have owned their homes a long time and are not paying property taxes on the current market value, which would certainly change if they were to purchase a new home. And of course, capital gains tax is an oft cited reason for staying put. These are all economic deterrents for sellers, especially those who are looking to retire in the near future.
So the big question for the coming year is:
Are home prices finally high enough to balance supply and demand? Or are we in for yet another year of tight inventory, bidding wars and frustrated buyers?
Demand will be tempered by slightly higher interest rates and supply will loosen up as record prices knock more would-be sellers off of the fence. Though this will not be enough to tip the balance of power to a buyers market, especially in this economically thriving and highly desirable community we call Silicon Valley. Sellers will remain firmly in control though we will likely see more modest price gains in 2014 vs. 2013.