Time to sell? Ready to buy? Economist says it's a great time to do both

Is now a good time to sell my home? When will mortgage rates increase? How much home can I afford?

These are questions on the minds of many homeowners and homebuyers. And to answer them, you need a bit of clairvoyance - or the next best thing, insight from Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors.

Yun is one of the most respected forecasters in the country, and he recently spoke about the Chicago-area housing market at a Real Estate and Economic Outlook event presented by the Mainstreet Organization of Realtors.

So what does the future hold for the housing market in suburban Chicago? Yun said the economy has made "a meaningful U-turn." That means job creation is strong, housing prices are rising and consumer confidence is high.

"The economic indicators are very positive," he said. Here are four key insights from Yun's presentation that may help you better predict your next move.

Mortgage rates are definitely going to rise.

This time last year, economists like Yun forecast mortgage rates to reach more than 5 percent by the end of 2014. That didn't pan out.

"One forecast variable that I have been consistently wrong about is federal interest rates, but if I have to be wrong about something, I'm glad it was this. After all, mortgages are the currency of our housing market. That the rates have stayed low for as long as they have has helped many first-time homebuyers as well as previously distressed sellers re-enter the market."

But mortgage rates won't be low for much longer. Yun predicts that they will begin to increase this fall - to 4.3 percent by the end of 2015 and 5.3 percent by the end of 2016.

"In markets like San Francisco, where home prices are at record highs, those percentage points can add a lot to the cost of a jumbo loan," he said. "Here in Chicagoland, where prices are more stable, the impact won't be as great. That's the upside to the region's slow pace in recovery as compared to the rest of the country - homes are still very affordable and will continue to be even as prices rise."

Yun encouraged people to work with Realtors when making decisions about when to buy or sell based on loan affordability. "They can help you see what's around the corner."

It's a seller's market.

As prices have risen, investors are stepping out of the market, and first-time buyers are moving back in to fill that void. But there are more buyers than there are available homes. Yun noted some key reasons for this:

• Developers are not building at the same pre-bust rate: Time on the market for spec homes, at three months, is at a historical low. But builders don't have the capital they need to match demand.

"Construction loans are very difficult to get," said Yun. "In Chicagoland, new home construction is slower than the rest of the country, which means that inventory will be even tighter next year unless more builders gain access to necessary credit."

• Increasing homeowner tenure. Until recently, homeowners on average lived in their homes six years before trading up. Beginning in 2008, however, that changed. Today, the median tenure of homeowners is 10 years. That means fewer existing homes are on the market at any given time, and with housing starts at historically low levels, there isn't enough supply to meet pent-up demand.

• Overly stringent lending standards. "The position of the National Association of Realtors is that qualified borrowers should have access to credit," he said. "Right now that is not the case." But there is hope for would-be homebuyers. Yun noted that a new method for determining FICO scores will raise the creditworthiness for many borrowers. There have also been changes in FHA loan programs, and community banks are once again engaging in "portfolio lending:" originating loans and keeping them on their books because of the low risk of defaults. In the past, these mortgages were generally sold to Fannie Mae and Freddie Mac.

No bubble here

Don't worry. We are not in another bubble, and nothing is going to burst.

In the Chicago area, home prices and sales volume in 2015 have increased steadily over the same period a year ago. But prices may be rising a little too fast for Yun's taste. "We want price growth to match income growth. Right now, it's highly unbalanced. We're seeing 8 percent growth in home prices but only 2 percent income growth."

So does that mean we are headed for danger? No, says Yun. That's because prices can't get so high they chop off demand. And annual home sales are still 20 percent lower than they were at the peak of the bubble. "The bottom line is that our economy will not be in recession, and job creation will continue to be steady."

In our area, some communities have seen even higher price growth. For the first quarter of 2015, prices in Aurora increased 31.2 percent, even as sales volume dropped slightly. Other towns that experienced notable price gains include Arlington Heights (21.1 percent), Palos Park (52.4 percent) and Wauconda (59.4 percent).

Pradeep Shukla, president of Mainstreet Organization of Realtors and managing broker of RE/MAX Renaissance in Des Plaines, noted: "The market is very strong across our region. Overall, sales volume so far this year is up 14 percent over 2014 in MORe's jurisdiction - which includes about 200 communities in DuPage, Lake and suburban Cook counties. The total value of detached homes sold in the first five months of the year topped $867 million."

Buying (or selling) a home should never be a rash decision.

Despite the good economic news, Yun warns against selling just because you expect rising prices will make you a lot of money. "You may win when you sell, but you'll need to spend more to buy," he said. "The best thing to do is to work with a Realtor who can educate you about local market conditions, give you good information about mortgage rates and help you find the right home within your budget."

He also warned against using home equity for frivolous expenditures. "Homeowners' equity will increase, but you shouldn't use your home as an ATM," Yun said. "If you need to borrow money to send kids to school or contribute to your own education, that's a good investment. Don't pull out savings for things like high-definition televisions. You need to think of your home equity as part of your retirement wealth, not a piggy bank."

• MORe is dedicated to anticipating and serving the needs of more than 15,000 Realtors, affiliates and licensed appraisers in South, West and Northwest suburban Chicago. MORe is the largest local Realtor member organization in Illinois and the fourth largest in the nation. To learn more, visit www.succeedwithmore.com.