Prices for both new homes and existing homes have increased markedly from 2011. New home sales for 2012 came in at 367,000. That’s 19.9% higher than the 2011 sales pace. Existing home sales increased as well, coming in at 4.65 million for 2012, up 9.2% from 2011. Part of this growth is due to the changing composition of home sales—there are fewer distressed sales (foreclosures and short sales) in the existing home market this year compared with last. The Fed’s attempt to keep mortgage rates low to keep housing affordable seems to be working.

The housing market still has a long way to go. What normal levels of activity are depends on many assumptions, but I think it’s safe to say that an annual pace of new home sales between 650,000 and 700,000 and existing home sales of around 5.25 million would be a reasonable expectation. But because we’re a long way from normal, I’m not too concerned that the Fed might be inflating a new housing bubble. The Fed is likely to continue or even expand quantitative easing to keep mortgage rates low. If anything, it’s just trying to reflate the market to healthier levels.

What is a qualified mortgage?
Something else that is likely to help the housing market is the Consumer Financial Protection Board’s (CFPB’s) release of a proposal for what a qualified mortgage is. Under the Dodd-Frank Act, the CFPB is tasked with defining what constitutes a qualified mortgage for regulatory purposes. Banks would like this defined because making a qualified mortgage provides them with certain legal protections. The CFPB proposed that a qualified mortgage shouldn’t make it such that all of a borrower’s debt doesn’t consume more than 43% of a borrower’s income. The CFPB’s proposal was met with mixed reactions: Is 43% the right amount? What about down-payment requirements?

Whether 43% is the right level is debatable. I think what really matters is that the term qualified mortgage is defined, as this will provide clarity and incentive to banks to make more mortgage loans. Since the CFPB’s proposed rule is designed to “ensure prospective buyers have the ability to repay their mortgage,” I don’t think the CFPB needs to include a down-payment requirement considering a down payment protects the lender, not the borrower. It’s the total amount of debt payments that determines a loan’s affordability.

Because the Fed is keeping mortgage rates low and the CFPB is providing some clarity on the rules of lending, housing will likely continue to improve in 2013.