DIY Investing

What could derail the housing market in 2015

Daniel Acker | Bloomberg | Getty Images

The housing recovery began losing steam toward the end of 2014. Rising home prices and tight credit combined to sideline potential buyers, especially those considering an investment in their first home. While hopes are high for 2015's spring market, there are several headwinds that could derail some of that optimism.

First and foremost is credit. While some claim credit is loosening, it is still far tougher to get a loan today than it was even before the heady days of the housing boom. Borrowers need higher credit scores, less overall debt, and full documentation of finances; the last one isn't quite as simple as it sounds.

Ross Miller, a mortgage broker in Metairie, Louisiana, described a client of his who was turned down for a loan.

"He had a 743 FICO score and was putting 50 percent down on a $200,000 home. A 743 FICO with a 50 percent loan to value," said Miller.

The trouble is, his client currently rents and pays his rent in cash. The bank wanted rent checks, which they could not provide.

Tight credit

"I believe that we are slowly moving toward more of a middle road when it comes to lending," said Miller.

The good news in the credit market is that the Federal Housing Administration (FHA), the government insurer of low-down-payment loans, is lowering its annual insurance premiums by half a percentage point, from 1.35 percent of the loan balance to 0.85 percent of it, effective January 26. That will make it easier for borrowers with less cash to purchase a home.

"It couldn't come at a better time. February is the start of the spring market," said David Stevens, CEO of the Mortgage Bankers Association in a recent interview.

Fannie Mae and Freddie Mac are also now offering a 3 percent down payment loan, but there are strict criteria for those borrowers: The borrower must be an owner-occupant of the home so it cannot be used for a rental home. The borrower must have a minimum FICO score of 680 and must carry mortgage insurance. The loan must be fixed-rate, no adjustables (ARMs), and the loan value cannot exceed $417,000. The borrower must also have debt-related costs of no more than 45 percent of his/her monthly income.

Low-down-payment loans are especially important now, as home prices rose higher in the past two years than most predicted. Mortgage rates are near-record lows now, hovering around about 3.75 percent on the 30-year fixed conforming loan, but they are expected to rise by the second half of the year if and when the Fed raises interest rates.

Pricey markets

While the price gains are easing, affordability joins credit as one of the top headwinds for housing in 2015. Home prices were rising in the double digits in 2013, thanks to investor activity on the low end of the market. Even in markets where there was not a lot of investor activity, prices soared. Several Texas cities, such as Houston and Austin, are seeing record-high home prices, and while there is some concern that layoffs in the oil market will derail that, the effects have not been seen yet. The median prices of both Houston and Austin homes are slightly above the national median of just over $200,000.

Price gains are easing because there are fewer distressed properties, and therefore investors are slowing their purchases at the low end of the market. All-cash sales, which are largely by investors in single-family homes, dropped to 35.5 percent of October home sales, down from a peak of 46.4 percent but above norm of 25 percent, according to CoreLogic, an analytics company.

Read MoreUS single-family starts hit 6 1/2-year high

Obama to reduce FHA mortgage premiums
Obama to reduce FHA mortgage premiums

Low inventory

Large-scale institutional investors do not seem to be selling their properties, especially since they've spent vast capital creating management infrastructures for the rental market. That should keep prices stable, but it does not help the inventory situation.

The supply of homes for sale is currently very low, just a five-month supply in December 2014, according to the National Association of Realtors (NAR), given the pent-up demand from younger buyers, who have been all but absent from the recovery. That is also holding back more robust sales now and potentially in the historically strong spring market. Rising home prices have given homeowners more equity and brought millions up from underwater on their mortgages, but that doesn't necessarily mean they have enough equity to afford a move up.

Sagging income

Younger buyers are also still cash-strapped, thanks to still weak employment in their age cohort.

A slow jobs recovery for Millennials has held back household formation for them, and it will slow down home ownership in the future," said Jed Kolko, chief economist at Trulia, a real estate sales and analytics company. "It takes a few years from when someone gets a job to when they're ready to buy a home."

Read More5 things to watch in housing in 2015

First-time buyers made up barely one-third of December home buyers, according to NAR. They are historically closer to 40 percent of the buying market.

Incomes have not kept pace with rising home prices, and rents are soaring to record highs. Rents rose more than 4.5 percent in 2014, according to Axiometrics. Continued high demand and limited supply will keep rents from falling in 2015, although their gains are slowing down.

That means that while renters may want to buy a home, they are precluded from saving for a down payment on that home. Again, low mortgage rates certainly help and low gasoline prices add to consumer savings, but until wages rise more dynamically, buying a home will still be out of reach for some potential buyers, not to mention for those who might be thinking about moving up to a better home.

Read MoreWill too many apartments pinch the rental market?

"Softness in consumer attitudes that drive housing demand will make for a subdued recovery and should persist absent more meaningful and sustained gains in household income," said Doug Duncan, chief economist at Fannie Mae.