A Crack Appears in the Housing Market

Although new home sales were up more than expected in July, existing home sales were down 1.2%.

Why?

Because investors bought fewer homes. They’ve made up as much as 35% of the market recently, but that percentage dropped to 15% in June. All-cash purchases were still high, at 31%. Normally, cash purchases are below 10%.

But housing’s up. The market’s coming back. Why should we care?

So glad you asked.

In a healthy market, first time home buyers drive sales, taking up 40% to 45% of the market. When more of this group buys homes, you have a sustainable recovery. They’re doing what average Americans do as they pass through the predictable spending stages of their lives. They earn more, spend more, and drive the economy forward.

The problem is, in May first-time home buyers only accounted for 28% of home sales. In June, that number inched up to just 29%.

When the most important people in the market go from being nearly half of all purchasers to less than a third, you don’t have a recovery. You have a
dead cat bouncing…

Just think about it: How can the housing recovery hold up if investors, the new majority, decide real estate isn’t an attractive investment anymore… and the really important guys, now the minority, are keeping their distance?

Quite simply: It can’t!

And it won’t.

Increasingly, large investors, who use house flippers to turn a quick profit, are backing away from real estate. As property values rise, the profits available fall.

According to Realty Trac, recent average profits were around $18,391, or about 9% gross. Net profits would be around 5%. Investors could make more than that, in the same amount of time, in the stock market these days.

Also, many larger investors and hedge funds now would rather take over a home that has already been fixed up. Individual investors have been taking advantage of that by flipping to them. But prices have increased to the point where many large funds are backing off. That hurts smaller investors as well because they have no one to easily flip to.

With the numbers we’re seeing, we think it’s time to dust off our crash helmets again.

Just look at this…

See larger image

Our 30 years of demographic research shows that almost all of the homes are bought between the ages of 27 and 41. And as you can see, it’s exactly in that group that homeownership rates have had the steepest decline.

The prime group, first-time home buyers between the ages of 25 and 34, dropped 7%!

The trade-up home buyers, those between 35 and 44 years old, dropped 6.3%.

Overall home ownership rates have dropped 2.7%.

The reasons for lower homeownership: depleted confidence in home prices, high unemployment, student loan debt, poor credit, low inventory, competition with investors and stricter loan standards.

No surprises here.

If first time buyers aren’t buying, then trade-up home aspirants have a harder time selling their homes to buy more expensive ones. So, this trend reverberates up the chain. And right now, those tremors are gaining power and momentum.

My money’s on investors continuing to back away from the housing market. That combined with the decline in home buying by the right people tells me that fundamental net housing demand will start to weaken again by 2014.

If you’re thinking about selling your house or condo, better do it sooner than later.

Harry

 

Ahead of the Curve with Adam O’Dell

Dream Turned Nightmare?

The percentage of Americans who own a home – the homeownership rate – just fell to an 18-year low. This shouldn’t be much of a surprise because we talk often about the mass exodus of displaced homeowners into the rental market.

Categories: Housing Market

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.