NEW YORK (TheStreet) -- Housing experts are starting to publish their forecasts for 2014 and the outlook is mixed.
Home prices are expected to rise at a slower pace, but the gains in prices are still likely to outpace rent and incomes, according to Trulia chief economist Jed Kolko. Also mortgage rates are expected to be higher, with the Federal Reserve expected to taper its quantitative easing program.
"The rising cost of homeownership will add insult to injury in America's least affordable markets: in October 2013, for instance, 25% or less of the homes listed for sale in San Francisco, Orange County, Los Angeles, and New York were affordable to middle class households," writes Kolko.
Still, buying is 35% cheaper than renting in the 100 largest metros, though in cities such as San Jose, prices and rates could rise high enough to tip the math in favor of renting.
On the plus side, the homebuying process might be less frenzied in 2014. That's because higher prices should encourage more homeowners to list their homes, including those who are no longer underwater. Home construction is also recovering. Plus, investors are scaling back their purchases, so there may be less competition from cash buyers.
Also, Trulia predicts looser credit as the refinancing volumes shrink and banks compete for mortgage purchase applications.
Still, first-time homebuyers are likely to remain largely locked out of the housing recovery, according to Kolko, with factors such as job security and saving enough for a downpayment still posing significant challenges.
Repeat homebuyers therefore will likey dominate purchases in 2014. Repeat buyers are "less discouraged by rising prices than either investors or first-time buyers because the home they already own has also risen in value. Also, the down payment is less of a challenge for repeat buyers if they have equity in their current home."
How much will home prices actually gain? Zillow (Z) said last week that it forecasts a 3% rise in 2014. Trulia stops short of making an actual forecast but says price gains will be slower than last year. Kolko notes that it does not matter how much it slows. What matters is why prices are slowing and where the gains are slowing. Prices are likely to slow because of more inventory, higher mortgage rates and fading investor activity. However, if prices reverse direction due to other macroeconomic factors such as a drop in consumer confidence or another government shutdown, that would be worrisome.
Also, a slowdown in prices would be welcome news in unaffordable markets such as California, but would be bad news in hardest-hit markets where a
recovery in home prices would stimulate local economies.
Finally, Trulia predicts that rental demand will shift from single-family rentals to urban rentals. With investor activity slowing, coupled with the fact that fewer homes are going into foreclosure, the supply of single-family rentals should cool. Meanwhile, young adults who move out of their parents homes to form new households are more likely to choose urban, apartment-style rentals and multi-family construction is much higher.
"The shift in rental activity from suburban single-family to urban apartments would be yet another sign of housing recovery," noted Kolko. That would mean that household formation, which is still well below its pre-bubble normal, is recovering. Household formation is one of the biggest underlying drivers of housing demand.
Trulia also released its top 10 markets to watch, with Bethesda- Rockville- Frederick, MD, Charlotte NC-SC and Denver, CO topping the list.
Read what Zillow has to say about the 2014 market for housing.
-- Written by Shanthi Bharatwaj in New York.