After 2013 outperformed many predictions, tempered, or cautious, optimism may be prevalent as we move into 2014. One example of this sentiment is the Wells Fargo Securities’ Economics Group.

“We look for continued modest gains in home sales and new home construction,” the group says of the national picture in its Housing Data Wrap-Up for December 2013, which it released on Tuesday. While the Economics Group remains “optimistic”, it cites several factors that cause it to adopt a “cautious outlook” for home sales and new home construction in 2014.

While home prices have bounced back in many markets and the foreclosure backlog, and all of its associated problems, has been greatly alleviated, much of this activity has taken place in a relatively thin market. An influx of investors, concentrated in the parts of the housing market where prices overshot the most, further exaggerated the turnaround in prices. By contrast, the fundamentals underlying the demand for housing, job growth, income growth and household formations, have improved much more modestly. With investors pulling back and monetary policy set to become progressively less supportive of housing, we look for continued modest gains in home sales and new home construction and expect price appreciation to decelerate back into the mid to low single digits.

Potential homebuyers appear to be gaining in optimism but the Economics Group expresses a number of reasons that buyers, sellers and builders may be apprehensive.

The improvement in buying plans coincides with a more optimistic assessment of labor market conditions and a decline in the unemployment rate.

 

Stronger economic growth should encourage household formation and gradually pull traditional buyers back into the housing market. We have been here before, however, and the past few years have shown us that there are plenty of reasons to be skeptical of any newfound confidence. Even with a 0.8 percentage point drop in the unemployment rate over the past year, the economic recovery remains exceptionally tenuous. Economic growth remains well below its potential, as measured from its pre-recession trend, which leaves the economy with ample capacity. For workers this means that there is considerable underemployment, which is one of the reasons wage and salary growth remain so sluggish.

The group also notes that the rise in home prices has had a negative impact on first-time buyers, resulting in more young people remaining renters until later in life than their predecessors.

The Wells Fargo Securities Economics Group notes that many builders, real estate agents and homeowners appear to be “upbeat.” But it also explains that this sentiment is more prevalent where conditions such as employment and income are growing and points out reasons to temper the optimism.