By Holly Martins  Updated on Thu Aug 21, 2014

You Finally Have a Better Shot at Landing Your First Home, Thanks to Some Good News

Frustrated potential home buyers may have some reason for optimism. A number of economic trends are beginning to coalesce into what could be the beginnings of a far better market environment for first-time and low to moderate income home buyers.

You Finally Have a Better Shot at Landing Your First Home, Thanks to Some Good News

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Do keep in mind, however, the important caveat that real estate is one of the riskiest economic activities to generalize about in terms of “national trends.” The reason for caution is expressed succinctly by Move, Inc. economist Jonathan Smoke.

“All housing is local — and hyper local at that — and behind each buying decision is a household with its own context for what’s right or best at that given time, as well as for the future,” Smoke says. “Secondly, fundamentally, life drives housing. Overall market conditions can influence the volume of activity, the balance of supply and demand, and the resulting price behavior, but it’s [at] the neighborhood level of households forming and going through life events that determine the need to buy or sell.”

With that disclaimer out of the way, it’s still worthwhile to reconsider the current housing market in light of all of the disparate reports on economic conditions surfacing at the moment. As home buyer confidence rises, there are declining commitments to buy homes, shrinking numbers of home owners, and consequently, an erosion of home price inflation (attention buyers!).

Growing consumer confidence

A brighter economic outlook has dawned as consumer confidence soared to a near seven-year high this month. The Conference Board said its closely watched index of consumer confidence jumped to 90.9 in July from 86.4 in June.

The reading, the highest since October 2007, was largely fueled by strengthening job gains and a stock market rally. Also, gasoline and food prices have stabilized after rising sharply in the spring.

Not that the economy is booming. Early this year, many economists had projected second-quarter growth closer to 4 percent, but they expect wage growth and consumer spending to pick up in the second half of the year.

Also holding back more robust economic growth is a housing recovery that has slowed significantly this year, in part because of higher home prices and mortgage rates, which can be viewed below.

Declining commitments to buy homes

Fewer Americans than forecast signed contracts to buy previously owned homes in June, a sign residential real estate is struggling. The index of  pending home sales declined 1.1 percent from the month before after rising 6 percent in May, according to figures from the National Association of Realtors (NAR).

Limited availability of credit and sluggish wage growth are making it harder for prospective buyers to take the plunge, threatening to throttle the pace of the housing recovery. Continued gains in employment and a bigger supply of available homes will be needed to help accelerate the industry’s progress, which Federal Reserve Chair Janet Yellen has said is lackluster.

Actual sales of previously owned homes did rise in June, with purchases increasing 2.6 percent to a 5.04 million annual rate, NAR figures showed. But, sales of newly built homes declined 8.1 percent to a 406,000 annualized pace in June, according to the Commerce Department. That report followed other data that showed new-home construction declined in June to a nine-month low.

Foreclosures are also on the decline, according to NAR. Distressed sales accounted for 11 percent of sales in June, with 8 percent of reported sales foreclosed properties, and about 3 percent short sales.

Shrinking numbers of home owners

The home ownership rate in the U.S. has fallen to a 19-year low the past few months as rising prices and tight credit kept many first-time buyers out of the property market.

The share of Americans who own their homes was 64.7 percent in the second quarter, down from 64.8 percent in the previous quarter, according to the Census Bureau. The rate matched the level in the second quarter of 1995.

Housing has become less affordable and more difficult to finance for entry-level buyers, even as mortgage rates have held close to record lows. First-time purchasers accounted for 28 percent of all sales of previously owned homes in June, compared with about 40 percent historically, according to NAR.

An erosion of home price inflation

As a result of these pressures, there are indications that soaring home prices may finally be coming back to earth. Standard & Poor’s Case Shiller index showed that average home prices in 20 large cities were up 9.3 percent in May from a year ago which amounts to the smallest annual gain in more than a year.

Housing market analysts say the moderating housing costs are actually good for the market, helping make homes more affordable, and giving many potential first-time buyers and low to moderate income families their first shot at landing a home at a price that won’t blow their budget.

It’s a healthy sign for the housing market. One economist says, the sooner housing corrects to a more sustainable growth rate, the better it is for the greatest number of buyers and their price expectations.


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