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What does 2014 hold for housing market in terms of prices, rates and sales?

With demand still greatly exceeding supply, prices have had nowhere to go but up, though early fourth quarter 2013 returns offer evidence that they’re plateauing.

The National Association of Realtors recently held its annual conference in San Francisco, and this year's gathering featured a bit of cautious advice from one prominent industry analyst.

NAR chief economist Lawrence Yun addressed the assembly and presented his market forecast for 2014 - one that includes continued growth but lacks the sort of expansion within the homeownership population many within the industry would like to see.

Yun predicted that the rate of home sales, while strong throughout 2013, will stay relatively flat in the coming year, primarily due to an inventory shortage that coincides with significant price appreciation in many of the country's metropolitan areas. As such, Yun also publicly stated his anticipation that median prices will rise by 6 percent - on the heels of an 11 percent rise exhibited in 2013 - and that mortgage interest rates will jump considerably over the next year. Based on the presumptive tapering of the Federal Reserve's $85 billion-per-month bond-buying program, Yun predicted that rates will reach 5.4 percent by the end of 2014, a significant rise from their current level of around 4.15 percent.

Real talk from realtors 
The forecast from the NAR economist is intriguing, and not only because the trade group has a vested interest in making homebuying a realistic possibility for more Americans. Typically a cheerleader for the housing industry, the NAR and its members don't always urge caution when it comes to market trends. But in this case, Yun is identifying an issue of availability that has resulted from the convergence of a few important factors.

Eye-opening price appreciation trends seen in coastal metro areas such as Boston, New York, San Diego, San Francisco and Seattle have been directly impacted by the fact that those markets are experiencing a serious shortage of available properties, either due to overcrowding, geographical boundaries, a lack of new home construction or some combination therein. With demand still greatly exceeding supply, prices have had nowhere to go but up, though early fourth quarter 2013 returns offer evidence that they're plateauing. There's some hope that the profit potential in such markets will urge more people to sell, but according to Yun the inventory issues won't be adequately addressed without significant gains in the construction sector.

"The inventory shortage will not go away," Yun told the conference. "Housing starts really need to ramp up going into next year. Otherwise, home prices will continue to go up. The only way to contain prices is that we need more inventory."

Building homes and a more sustainable industry
To Yun's point, many builders have struggled to secure financing for new development, and the new-home supply has been held down at historically low levels as a result. He did project improvement in 2014, forecasting that sales of newly constructed homes will rise by 18.5 percent and that construction starts will increase by 25 percent from approximately 600,000 units this year.

The anticipated price gains have as much to do with the Fed's plans as they are a reflection the trends exhibited over the past two years. Since 2011, median home prices have risen 18 percent and the volume of total home sales has increased by 20 percent, according to the NAR. The housing market has indeed undergone a gradual recovery, and most prognosticators expect that to continue, even if it's at a slower pace.

But the prognosis is undeniably influenced by the seemingly inevitable interest rate hikes - something that won't help in terms of any inventory shortage or in encouraging new buyers to enter the market.

Yun's calculations for where rates will end up by the end of 2013 are admittedly tied directly to his expectations for reductions to the Fed's quantitative easing program, which were originally scheduled to begin in earnest this past September, but have been delayed until the central bank sees evidence of more significant growth in employment and widespread economic viability.

"[Rising interest rates] will be due to the anticipation that the Fed will start to raise rates in 2015," Yun said during a press conference in San Francisco. "Tapering also will have already taken place throughout 2014."

The most recent jobs report offered some promising indications that the national economy and rate of joblessness are easing, certainly when compared to where they stood five years ago. However, Fed officials have been intentionally vague when discussing the plans for tapering, and no one knows exactly what their timetable looks like. The only certainty is that if and when the purchasing pace is reduced, rates will rise as private lenders are forced to compensate for the lack of federal infusions to the mortgage market.

In the meantime, anticipated job growth in places like Atlanta, Denver, Houston and Seattle could provide a boon to the construction sector, which would in turn help negate the current inventory shortage. How soon new homes are available - and how that availability coincides with rising rates - will play a large role in determining home sales numbers for 2014.