Homebuyers Coming Back In Force

It is safe to say that the U.S. housing market has gained traction, and is recovering. After years of stagnation, the market has finally begun to take substantial strides. Last month, the median home price for an existing U.S. home hit an all-time high of $236,400. This represents a sharp 6.5% increase from one year ago. Last month’s high surpassed the previous mark of $230,400 set in back in July of 2006. If that wasn’t enough, existing home sales rose 3.2% and the pace of sales remains the strongest in over eight years. This recovery is not an overnight fluke. It is the culmination of steady progress the market has been making for years. The following items are the biggest reasons the market has begun to rise:

1. Increased demand/limited supply: After years of a soaring renter’s market, it may have finally reached a peak. With low interest rates and rising rental prices, many tenants are slowly coming back to the buyer pool. This demand has played a part in pushing home prices higher. Additionally, many renters who suffered through a short sale, foreclosure or bankruptcy after the economy suffered are now seven years removed. This is the typical threshold that allows buyers to begin looking at conventional mortgage programs again. This has further added to the number of buyers giving sellers more options to choose from. In many parts of the country, there is a lack of real estate inventory. Couple this with increased demand, and sellers clearly have the upper hand. This has created bidding wars on many properties, which has helped send prices to all-time highs.

2. Improving economy: National unemployment figures are gradually improving for many areas. There are a few regions that are still suffering from high unemployment, but for the most part job growth has been robust. With increased confidence in employment, buyers are most comfortable looking at houses. They are more willing to commit to a 30 year mortgage, as opposed to a short-term, twelve month rental. Foreclosures and mortgage delinquencies are down nationally, and the economy is no longer an everyday topic.

3. Low interest rates: Arguably, the main reason that buyers have come out in force are the low interest rates. Although home prices are rising, there are still many good deals out there. With low interest rates, buyers are getting more bang for their buck, which makes more sense than renting. With reduced mortgage payments and improved employment confidence, many buyers feel that the bottom of the market has come and gone. There is a bit of a scramble to get in now before they get too much higher. Interest rates have risen slightly from all-time lows, but are still well below average. As long as rates stay in this ballpark and real estate remains affordable, the demand should continue for the foreseeable future.

4. Preferred retirement vehicle: It wasn’t that long ago that real estate was looked at as a way of forced savings. Buyers would purchase a home, make the payments for 30 years and at the end of their term own their home free and clear. When home values exploded last decade, the thinking started to change: many homeowners looked at their homes as a piggy bank. Fast forward some eight years later, and more buyers are looking at real estate as a primary retirement option again. Many buyers have become frustrated with fluctuating stock market returns and prefer the long term outlook that housing provides. If young buyers share this point of view and start looking at housing, it will have a dramatic impact on the number of first-time homebuyers.

5. Seasonal bump: It is not a coincidence that the two months with the highest sales price averages were warm weather months. The weather wreaked havoc in many areas of the country this year. This caused real estate activity to slow down. Once the weather started to change buyers have come out in force. Buyers that were on the sidelines in the winter have caused the market to rise. This trend should continue until at least the end of the summer. July and August are predicted to be strong, as many buyers should look to close before the end of the summer and start of the school year.

The growth of the housing market was not isolated to certain areas. Many parts of country saw sharp increases, but the Northeast stood out. They saw a 4.3% increase in sales with an annual rate of 720,000. The median sales price in the region was $281,000; which is an annual increase of just under 4 percent. What makes the national growth so impressive is that it has taken a gradual approach. When the market took off last decade, homes were rising annually at a 10-20% clip. The market could never sustain this pace, and eventually the bubble had to burst. Today’s growth, while strong, is not so strong that it is artificial. Much of the increase has been done without the aid of new loan programs or drastic changes in guidelines. Banks have slowly started to loosen qualifications, but have not made sweeping changes some predicted was necessary.

Things are certainly looking up for the real estate market. It appears that this may be just the beginning of more upward trends. Things appear strong, and there are no signs of change coming any time soon.