Why More Troubles Lie Ahead for the Housing Market

I completely disagree with the notion that the housing market in the U.S. economy is improving.

No doubt, we have seen home prices increase, but the price increases have been minor and restricted to certain geographical areas—but by no means do the price increases suggest there are actual improvements in the real estate market. In fact, the housing market may face even more trouble ahead.

For the housing market to see real recovery, we need to witness increased participation from home buyers. While an increase in home prices may suggest to some that there are actual home buyers coming into the market and pushing prices higher, the truth is the opposite.

When I say “home buyers,” I don’t mean institutional investors who have been buying homes in the U.S. housing market to rent. I mean those individuals who actually buy a house to live in it—they are not there to speculate.

In June, first-time home buyers accounted for 29% of all the existing-home sales in the U.S. housing market—down more than nine percent from the same period a year ago. According to the National Association of Realtors, in a healthy housing market, first-time home buyers should account for 40% of all existing-home sales. (Source: National Association of Realtors, July 22, 2013.)

I can see the number of real home buyers decline even further.

The national average commitment rate for 30-year mortgages, reported by Freddie Mac, was 4.07% in June. In the same period last year, it was 3.68%. As mortgage rates continue to rise—and they will as the Federal Reserve prepares to “taper” quantitative easing—it will become more difficult for home buyers to afford a home.

Consider this: the Housing Affordability Index, from January to May of 2013, has fallen 18%. It stood at 172.7 in May and was 210.7 in January. (Source: Federal Reserve Bank of St. Louis web site, last accessed July 23, 2013.)

I wish I could say the U.S. housing market is witnessing a recovery, but the statistics suggest otherwise. I will consider the housing market to be improving when I see real home buyers returning to the market and buying homes. As it stands, with interest rates on the rise, I can’t see them returning for years.

The yield on the U.S. 10-year Treasury stands at 2.55% this morning—116 basis points higher than one year ago. As rates continue to rise, the dynamics for institutional investors change. At one point, they will become sellers of homes, not buyers. And this will put more pressure on the housing market.

For more related topics, visit Real Estate Investment 101.

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