Sales of previously owned homes dropped unexpectedly in March 2013. Real estate experts attribute this drop in the supply of homes on the market to a number of factors. The National Association of Realtors reported that sales in June were still 15.2% higher than a year ago in June. This is optimistic news for the future of sales of previously owned homes. The market conditions are supporting a continued sales increase.
The credit market is still tight and this is causing many qualified people to stay out of the market. Regardless, with the availability of distressed homes declining, conventional sales are increasing. Many Americans are holding back putting their homes on the market hoping property values will continue to rise. So, the outlook for more previously owned homes coming on the market is very good.
The FHFA House Price Index for the United States shows that prices have been increasing since the last quarter of 2012. The median price was $184,300 in June 2013, up from $164,800 in March of 2012.
The highly regardedCase-Shiller Home Price Aggregate Index of a 20 metro area composites shows that prices began to climb in the last quarter of 2012. The median price for homes in the 20 metro composite is $160,000, up from $148,000 in the 1st quarter of 2012. Cleveland, Detroit, Tampa and Las Vegas have produced the most modest gains in median prices.
Although interest rates have risen from the May, 2013 low of 3.5% to the current rate of 4.25% for a 30 year fixed prime mortgage, it is unlikely that this is keeping buyers out of the market. There is a slight chance that the 4.25% rate will decline, but this rate is infinitely better than the 6.50% to 7.00% that we saw in 2008 and 2009. We have not seen mortgage rates at 4.25% in over 30 years. In fact, we might have to go back to the 50s when the rate was 3.0%.
The near-term future of mortgage interest rates is going to be largely determined by the Federal Reserve. The benchmark short-term interest rate has stayed at near zero. Bernanke is still concerned about unemployment bring too high, and inflation continues to stay below the Federal Reserve’s 2 % target. Bernanke believes that a “… highly accommodative monetary policy for the foreseeable future is what is needed for the U.S. economy.”
The unemployment rate is still too high to support a significant increase in previously owned home sales. Federal Reserve chairman Ben Bernanke says the payroll employment expansion has been steady at 150,000 jobs per month in 2011 and 2012, but that this growth rate is too slow to lower the unemployment rate to the point that will bring more buyers to the market. Many people do not understand that the labor force is still 6 million workers below the pre-recession period. The economy will require substantial job creation to provide work for the new job market entrants and for the returning workers. If the unemployment rate declines only slowly as predicted by the Federal Reserve, then the housing market will not see the number of buyers that could enter the market if they find good jobs. The unemployment rate affects everyone because people who are out of work cannot support the kind of economic growth that we need.
There are many qualified potential buyers setting on the sidelines that are waiting for the right house at the right price to come on the market. There are many sellers who have lost a lot of equity over the past five years who are waiting for the prices to rise to a point where they can recover much of their lost equity.
The term “qualified potential buyers” needs to be reviewed. With the credit markets still tight, only those with pristine credit histories and FICO scores in the 700s will be able to obtain a prime loan. Certainly buyers that have a mediocre credit history and a FICO score around 620 will get a mortgage if they have a large down payment. It’s all about protecting the mortgage company from any more foreclosures.
While this may seem like a situation that will lead to an expansion of home sales eventually, the question is when this will happen?
Accelerating economic output growth will lead to improvement in the labor market. The contraction in payroll employment was more substantial in this recession than in previous recessions, peaking at an average monthly rate of 758 thousand jobs lost in the first quarter of 2009. Payroll employment has been expanding consistently in 2011 and 2012 at an average rate near 150 thousand per month, but this pace is too slow to lower the unemployment rate in a meaningful way. The unemployment rate has come down from its peak, but this owes much to a contraction of the labor force which has recovered somewhat and recently dropped below its pre-recession peak. Further reductions in the number of the unemployed will depend on the creation of jobs to absorb workers entering the job market for the first time. Future reductions in the unemployment rate will require enough job creation for entrants to the labor force for the first time, and for workers who are returning to the job market. The U.S. Department of Labor Experts expect a growth in employment, but the growth will be slow. They look for unemployment to still be above 7% at the beginning of 2015.