After big rebounds in housing prices…More modest gains are likely this year.  Appreciation in home values (national average)…up 4% – 4.5%, compared with a gain over 11% in 2013.

One reason:  Rising mortgage rates…5% or so for 30-year fixed rate loans by the end of the year.  Tighter lending rules will also contribute, especially slapping first-time-buyer demand.  A harder line on debt-to-income ratios used by lenders to qualify borrowers will hurt younger potential buyers, who have seen little wage growth in the past few years and are often shouldering large student debt loans. 

Fewer investors offer all-cash deals, too, with bargain prices and interest rates fading away. 

Plus more existing homes will go up for sale, as price hikes pull homeowners out from mortgages that are underwater, making them more willing to sell.  Sales will climb by 4%, but inventory won't be as tight.

And new-home building will accelerate again, helping to offset the construction drought of 2008-2012.  Look for housing starts this year to climb by 15% and top 1 million for the first time since 2007.  Still far below the 2005 pace, though. 

Sales of new homes…an additional 16%, a tad less than last year's increase.

Affordability, though declining, is still better than the historical norm:  A median-price home costing 20% of household income.  In 2013, it took just 15% of income to buy an equivalent home.  When mortgage rates rise to 5%…17% of income.

All things considered, the price slowdown is good news, signaling a pattern of sustainable, long-term growth and alleviating fears of another bubble in the works.  Annual price gains and the pace of existing-homes sales are close to normal.  It measures to the share of the 1998-2002 level. 

But there's still a long way to go till home building is back to good health.

Source:  The Kipling Letter – Vol. 91, No. 7