A bull’s (and bear’s) eye view of the 2014 housing market

Whether 2014 will be another banner year for real estate or wind up strangled by skyrocketing interest rates largely hangs on five key determinants.

Inventory, the state of the home construction recovery, what becomes of mortgage credit, how investors decide to handle their homes and whether housing hits an affordability tipping point will largely shape the real estate year ahead. Not to mention the rate at which newly-confirmed Federal Reserve Chairman Janet Yellen opts to roll back the agency’s bond-buying program, which up until now has kept interest rates low.

The bullish take on the year ahead is that low inventory will prompt rising prices, which will in turn persuade lenders to loosen the purse strings. Optimists also point to dropping mortgage delinquency rates as a sign that the problem of distressed housing is, for the most part, behind us, the Wall Street Journal reported.

But a bearish outlook would say that the Fed’s bond buying artificially inflated home values — a balloon that will pop once the Fed pulls back in earnest. Record low interest rates prompted buying among both borrowers and all-cash investors, the thinking goes, while prices that rose nearly 20 percent in two years blocked many first-time buyers from the market.

Once mortgage rates jump, according to this view, housing demand could slow and investors may well unload the homes they bought, leaving mortgage lenders in a lurch and keeping credit guidelines strict. [WSJ] — Julie Strickland