Could it be that the housing market is still recovering from the great recession? Maybe, considering that the housing market has not fully returned to a stable cycle. Consider the inconsistency of annual home sales that seem to surge every three years, the steep home price increases over the last four years, and the lack of move-up home buyers in the market.
Summer is typically the strongest time of year for the market. However, the National Association of Realtors reported that existing home sales decreased during June and July of this year (a decrease of 1.8 percent and 1.3 percent respectively). And July’s Pending Home Sale Index (projecting future sales) decreased 0.8 percent (nar.realtor).
Of course, the NAR’s take on this bump in the road is provided by their Chief Economist Lawrence Yun. Yun described the discrepancy of wage growth to home price gains as a reason for this summer’s home sale slide. He explained that the median home sale price increased 38 percent in the last five years, while hourly earnings only increase 12 percent. He points out the obvious, that sharply increasing home prices are creating an affordability gap, which is pricing many home buyers out of the market.
Yet, according to the NAR, “Home buyer” traffic continues to grow, while the housing inventory continues to shrink (the national home sale inventory during July decreased 9.0 percent from the same time last year).
The reality, therefore, is that sales in coming months will not break out unless supply miraculously improves. This seems unlikely given the inadequate pace of housing starts in recent months and the lack of interest from real estate investors looking to sell.
Home sale inventory has been an issue for the housing market since its slow recovery began four years ago. Although many will explain away the dearth of homes for sale as a result of strong demand and quick home sales. However, they do not take into consideration that currently for every three homes that sell, there is one that does not. The 1 in 3 fallout is the expectation in a typical market, while there is only a 1 in 10 fallout in a market with strong demand (such as in 2005), so home buyer demand is not exceedingly strong.
Of course, the main reason for the low housing inventory is that home owners are staying in their homes much longer than in the past.
According to the NAR, between 1987 to 2008 home owners stayed in their home an average of six years before buying their next home. However, since 2010, the average time grew to fifteen years! The result is a lower number of move-up home buyers in the market, and a reduced number of homes to sell.
One of missing pieces to a stable housing market has been the move-up home buyer. The move-up home buyer is the buyer who will sell their current house to move into another home. The necessity of move-up home buyers was acknowledged as part of a healthy housing market way back in 1985, when the economy was recovering from the deepest modern recession at that time (Move-up Buyer Provides The Base For A Recovering Housing Market. chicagotribune.com. August 17, 1985). Part of the housing recovery of 1985 was the increased participation of the move-up home buyer. As move-up home buyers “upgraded” to larger home, more affordable modest homes become available to first time home buyers.
Low housing inventory combined with elevated first time home buyer activity has fueled home prices over the last four years. Until move-up home buyers are fully participating in the market, we will continue to see continued lack of inventory, steeper home sale price increases, and unpredictable market cycles.
Copyright© Dan Krell
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