Buyers Eager To Buy Available Homes
The housing market has been one of the strongest sections of the economy in 2016.
Rising wages and shrinking unemployment have driven the housing market upward.
Also assisting the market is low mortgage rates. Freddie Mac reports that the current average rate for a 30-year fixed rate mortgage is 3.59%, and rates are expected to stay below 4% in the coming months.
Despite a rosy outlook for the housing market, sales of existing homes slowed in February compared to January, a very strong month. Surprisingly, the slowdown is not likely because of waning interest in home buying.
Rather, buyers are still eager to move quickly on an ideal home at the right price. Diminished buyer activity appears to have been caused by three factors that have very little to do with a softening market.
Existing And New Home Sales
One of the most effective ways to judge the strength of the housing market is to look at the current pace of home sales.
If home sales are strong, there is a general consensus that investing in a home is a good decision. Therefore, new buyers can factor home sales data into their decision to buy a home.
There are two prominent home sales reports published monthly.
- Existing Homes Sales
- New Home Sales
The Existing Home Sales report is published by the National Association of REALTORs® (NAR). It reports an annualized number of pre-owned homes sold in a given month. These homes are being sold by current owners who are upsizing, downsizing, or selling for any number of other reasons.
This report could be viewed as consumer sentiment about the housing market. Private homeowners typically offer their homes up for sale when they feel they can sell it quickly and for a reasonable price.
The New Home Sales report comes from the U.S. Census Bureau, and counts recently-built single-family homes that have sold. New home sales pace shows confidence in the housing market from an industry perspective, since home builders need to take a financial risk to build a house months before they can sell it.
Taken together, these two reports give a broad overview of housing market health. So how do recent numbers look? There are strong indicators of a healthy housing market in 2016 and beyond.
New Homes Boost Housing Supply Nationwide
The annualized number of new homes sold in February increased to 512,000, a two-percent increase from January.
Strong sales prompt builders to keep adding homes to the “supply” side of the housing market.
More new homes coming onto the market should help keep home prices in check. New homes account for about 10 percent of sales, so it is vital that builders continue to add supply.
Not only are sales up, but construction is up too. In February the construction of single-family homes increased by seven percent, and new homes have been growing at a quick pace for the past year.
Buyers will have more options as these homes come on the market.
Three Factors Skew Assessment Of Home Buyer Interest
Existing home sales were down sharply in February. The NAR reports that sales of existing homes fell seven percent to an annualized rate of around five million.
However, the raw numbers might not tell the whole story. There were three factors at play that caused this slowdown.
- Inclement weather
- Rising prices
- Few available homes
These factors may misrepresent actual home buyer interest.
Bad weather slows down the home buying process, but does not truly indicate home buyer enthusiasm.
Rising prices indicate high interest in buying, but ironically, can result in slower sales as some are priced out of the market.
Low inventory means that quality homes are being snatched up, sometimes the same day they were listed. Like rising prices, low inventory indicates strong interest in buying, but also a hurdle keeping some from acting on that interest.
These three indicators point to a strong housing market despite lower numbers in February. In this case, a closer look reveals that buyers still want homes.
Fortunately, slower sales in February could result in greater supply which assists home buyers moving forward. As long as housing supply increases and demand doesn’t increase anymore, the upcoming home shopping season could prove to be buyer-friendly.
Housing Market Primed For A Big Season
The three factors that led to a decrease in existing home sales should not deter would-be home buyers.
Inclement weather, which also hurt the housing market in January, should become less of an issue as weather improves.
Rising prices should also make a smaller impact on home buyers’ decisions. According to Freddie Mac, home prices are expected to increase at a rate of 4.8% in 2016 — lower than the 6% increase in 2015.
Likewise, mortgage rates were expected to increase. But now 30-year fixed rates sit in the mid 3’s, making even higher-priced homes more affordable for the average family.
The shortage of homes is the most pressing issue looking forward. However, the housing market seems to be adding homes quickly enough, and the decrease in existing home sales should increase the housing supply as well.
While winter tends to be the slowest season for the housing market, spring is often the strongest season. The current health of the housing market suggests that the upcoming spring season won’t be any different.