Existing Home Sales Increase But Overall Market Continues To Underperform

While existing-home sales inched up a slim 1.2 percent in February, the National Association of REALTORS® recently reported that constrained inventory levels pushed price growth to its fastest pace in a year.
Total existing-home sales grew to a seasonally adjusted annual rate of 4.88 million in February, up from January’s 4.82 million. Sales are 4.7 percent higher than a year ago and above year-over-year totals for the fifth consecutive month.
The median existing-home price for all housing types in February was $202,600, which is 7.5 percent above February 2014. This marks the 36th consecutive month of year-over-year price gains and the largest since last February (8.8 percent).
Lawrence Yun, NAR chief economist, says although February sales showed modest improvement, there’s been some stagnation in the market in recent months. “Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” he says. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”
First American Chief Economist Mark Fleming believes that the market is underperforming and in response, has developed a proprietary model using market fundamentals to provide perspective on the current level of actual existing-home sales, gauging whether actual existing-home sales are outperforming or underperforming.
“Existing-home sales are currently below expectations because significant numbers of existing homeowners lack sufficient equity or remain underwater,” says Fleming. “Nonetheless, the virtuous cycle of rising home prices and increasing homeowner equity should help actual sales to close the gap with the level of sales we should be seeing based on current market fundamentals.”
Total housing inventory at the end of February increased 1.6 percent to 1.89 million existing homes available for sale, but remains 0.5 percent below a year ago (1.90 million). For the second straight month, unsold inventory is at a 4.6-month supply at the current sales pace.
Freddie Mac found that the average commitment rate for a 30-year, conventional, fixed-rate mortgage in February slightly rose to 3.71 percent from 3.67 percent in January, marking the first monthly increase since September 2014.
“We continue to expect the economy to drag housing upward as we move into the second quarter,” says Fannie Mae Chief Economist Doug Duncan. “The economy is getting a boost from the strong employment numbers we’ve seen last year and at the start of 2015. When this employment growth partners with income growth and consumers experience a rise in their personal household income, we should see a similar boost in the housing sector. Overall, we expect an improving 2015 with continued economic growth bringing housing above 2014 levels.”
“With all indications pointing to a rate increase from the Federal Reserve this year – perhaps as early as this summer – affordability concerns could heighten as home prices and rents both continue to exceed wages,” adds Yun.
Fleming believes that as the Fed contemplates raising rates because of strengthening economic conditions, pent-up demand rises. “According to my model, current market fundamentals support a higher level of actual existing-home sales due to the strength of continued labor market improvements and rising house prices,” he says.
It’s important to note that Fleming’s model does not track actual housing sales directly. Instead, Fleming notes, it looks at the economic factors that traditionally drive the housing market and provides perspective on the health of the housing market compared with traditional norms. According to Fleming, today’s housing sales are underperforming based on current market fundamentals: economic, demographic, price and interest-rate trends.
“If we have a sense of how much home sales volume there should be given the fundamentals, then we have context to understand the actual amount of sales volume that we observe,” says Fleming. “Right now, we believe the underperformance of actual sales is largely because a significant number of existing homeowners lack sufficient equity or remain underwater.”
Fleming stresses that it’s important for real estate professionals to educate consumers that affordability is higher than the historical average, and that Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) continue to work to make credit available to more borrowers by providing access to low down-payment mortgages. “While interest rates may rise, that is because of healthy economic conditions benefiting borrowers,” says Fleming. “As demand for housing continues to increase, the market will continue to heal. Real estate professionals have an important role to play in speeding that healing by ensuring that consumers are aware of all their options for homeownership.”

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