4 Reasons the Housing Bubble May Pop in 2014

by Rick Aristotle Munarrizby Dec 30th 2013 11:00AM

The housing rebound is on a roll. Home prices continue to inch higher, and the number of indicators showing economic improvement suggest we’ll enjoy an even rosier 2014, when the Fed won’t have to do quite as much to keep the good times going.

However, there are also more than a few hints that in the year ahead, the housing market’s rebound may take a breather — or we may experience something far worse. Let’s take a look at some of the warning signs.

1. Mortgage Rates Are Moving Higher

The economy’s gradually getting on track, and that has resulted in interest rates inching higher. Naturally, the higher the rate, the less bang potential homebuyers get for their bucks.

There’s little reason to expect this trend to reverse. The Fed recently announced that it’s ready to begin tapering its rate-suppression plan by reducing its bond purchases by $10 billion a month. Easing up on this latest round of quantitative easing — QE3 — will have an impact on interest rates. After all, if the Fed’s $85 billion in monthly bond purchases created the illusion of demand, what will the reduction do to the real demand?

In other words, interest rates for a range of investments are likely to continue inching higher in the year ahead. There’s a reason why savvy investors have been pouring money out of bond mutual funds in recent months as higher rates result in lower bond prices.

2. It’s No Longer House-Hunting Season

The National Association of Realtors has reported three consecutive months of declines in existing home sales.

Housing bulls will argue that the market is still strong. The association representing real estate professionals still expects 5.1 million homes to be ultimately sold in 2013, and that’s the highest tally since 2007. Is that worth bragging about? Is it merely a coincidence that 2007 was when the last housing bubble popped?

Either way, the last several months have not been kind, and that’s enough to kill any of the favorable momentum the market experienced earlier in the year when rates were bottoming out.

3. The Mortgage Market is Starting to Dry Up

With homes getting more expensive and interest rates getting higher, you might expect interest in buying to dry up, and that’s exactly what’s been happening.

Weekly home mortgage applications have fallen to their lowest level since late 2000. The spike in rates has killed off refinancing applications, but loans for home purchases are also starting to slump according to the Mortgage Bankers Association.

That certainly isn’t a good sign for a housing market where a rebound in prices needs a fluid mortgage market to keep sales coming at a reasonable pace.

4. Home Builders Are Getting Greedy

All of these factors would seem to be warning signs for developers, but they don’t seem to be heeding the cautionary signals. Housing starts are soaring as U.S. home builders broke ground on new homes last month at the quickest pace in five years.

It’s easy to see why the builders are getting more aggressive given the rising home prices, but who is going to pay for these new digs in 2014?

In its latest quarter, luxury home builder Toll Brothers (TOL) reported that the average price of its new homes clocked in at $703,000, a whopping 21 percent ahead of what it was charging a year earlier. However, there’s a “Toll” to be paid for this sort of behavior in the market. Orders for new Toll Brothers homes fell by 10 percent during the quarter.

Toll isn’t the only developer experiencing a slide in orders. So what will happen after all of the new construction that’s underway hits the market next year?

The housing market bubble may not pop in 2014, but it’s highly likely that it will lose some of its sudsy essence.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.