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Will Lower Mortgage Rates Resuscitate Flagging Existing Home Sales?


Will Lower Mortgage Rates Resuscitate Flagging Existing Home Sales?

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Digging deep into the disappointing recent numbers for existing home sales, there are a lot of bright spots one can take some confidence in. First, mortgage rates have been dropping. In fact, mortgages are at historically low levels right now. Moreover, the U.S. government has been quite active in trying to get first-time homebuyers to pull the trigger and buy. The overall U.S. employment figures have been improving, despite the fact that jobless claims have been hovering over the 300,000 psychological threshold during the past few weeks. If you put all these factors together, it is very tempting to conclude that the U.S. housing market will improve drastically in 2015.

The problem is that there is a missing element to this calculation. Keep in mind that the housing industry started experiencing an upward climb when investors stepped into the market. Due to the huge wave of foreclosures in the wake of the 2008 financial crisis, a lot of previously hot real estate markets featured steeply discounted homes. Investors stepped in and bought up all these artificially depressed inventory, and this started the rehabilitation of the American real estate market. Unfortunately, the market can’t keep going solely on purchases made by investors. First-time home buyers must step in eventually.
Unfortunately, this is not happening. First-time homebuyers are not filling in the demand gap. Investors can only push the market so far. What is keeping first-time buyers out?
First, the jobs market isn’t as positive as government forecasters make it out to be. A lot of the jobs being created are lower-paying jobs. Also, there are a lot of Americans who have given up looking for work altogether.
Another key factor is that, while mortgage rates are dropping, the overall prices of homes are increasing. A lot of would-be first-time homebuyers are feeling that they are just being priced out of the market. Looking at the broad real estate map of the United States, one would think that prices are still reasonable. However, if you look at the hottest markets, this is far from the case.
In the hottest markets, like Los Angeles and San Francisco, prices have gone crazy. In fact, the upward appreciation of home prices in certain areas has pushed the median price of existing homes to 6%. This is the highest rate of appreciation in seven years. Homes are now increasing in value at the same rate they were, prior to the crash. Put altogether, it is no surprise that a lot of would-be first-time homebuyers are getting cold feet. If things don’t improve, as far as the jobs picture and home price appreciation rates are concerned, we may have hit a plateau in the housing market. If so, this spells bad news for the broader economy.

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