As the Existing Home Sales numbers for the month of July reported by the National Association of Realtors (NAR) Thursday suggest, we are seeing a continuation of the housing market recovery, with spring sales volumes finally being realized.
While the fourth quarter of 2013 and the first half of 2014 saw a lag in activity, largely attributed to the harsh winter, lack of job growth and negative consumer confidence, we are experiencing a relatively continuous uptick in sales. We anticipate a robust second half of 2014 as housing inventories—which were dangerously low at the beginning of 2014 at less than two months of inventory—are now at five months of inventory. A healthy residential real estate market has six-to-eight months of available inventory.
A number of encouraging factors are helping to drive this more traditional buying and selling cycle. Consumer confidence, now at a six-year high, is a key influencer of the home-buying and selling cycle. We are also noting a resurgence of consumers who are buying homes as their primary or even secondary residences, versus solely for investment. As well, more and more homeowners are the sellers of properties, as opposed to investors or banks dealing with distressed inventories.
Initially, the real estate recovery was fueled primarily by private equity and investors. And while that removed large blocks of distressed properties from the market, it was not a sustainable long-term model. The more traditional cycle we are currently seeing is not only encouraging, but an appropriate recovery tract.
The latest analysis of the nation’s housing industry has also put a spotlight on the various segments of the market and how each is fairing through the course of the recovery. While the luxury market has had strong sales recorded throughout most geographic regions, the mid-market continues to work through lower-than-peak values.
Still, prices across the nation are increasing, so in many markets negative equity is giving way to positive equity, meaning that fewer people are ‘underwater’ and enabling more people to sell their homes. At the height of the downturn, for example, we saw approximately 15 million mortgages nationwide with negative equity out of approximately 55 million total mortgages. Today, that figure has been reduced to between six to seven million mortgages, a more manageable volume.
First-time homebuyers continue to track at around 28% of home sales versus the historical average of 40%. A number of factors are impacting this market; among them, limited inventory, stringent credit standards, dramatic increase in student debt, the spike in FHA mortgage insurance premiums, and stiff competition from cash buyers.
Yet, while underwriting standards are more rigorous, we are seeing a positive trend as buyers are increasingly able to secure financing, particularly through the assistance of quality loan officers who understand and specialize in working through the loan process. We also note that beginning the search for a home already mortgage pre-qualified is more important than ever been before.
The Value of Homeownership
Areas of the country that suffered the most in the downturn, particularly Las Vegas, Arizona, South Florida, have seen a resurgence in sales fueled by international buyers from a variety of destinations including China, Canada, parts of Latin America and Europe, as the United States’ residential real estate market continues to be viewed as a prudent investment.
With the uptick in consumer confidence, increasing home values and other positive economic factors, the intrinsic value of homeownership continues its resurgence.
While a full recovery is potentially two to three years away, the trend-line is positive. Job creation and overall economic growth are necessary to continue fueling the market, which, as current activity indicates, we anticipate seeing more of in the year ahead.