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Spring is house-hunting season. The months of April, May, and June typically account for 40% of all home sales for the year, according to Freddie Mac. And this year, sellers have the advantage—in some parts of the country, by a lot.
Home prices are going up. Wages aren’t keeping pace. And the housing supply is tight, driving prices up even faster. Lately as many as 40% of homes have sold at or above listing price, according to data from the National Association of Realtors and RealtyTrac, an Irvine, Calif.-based data firm.
From a bird’s eye perspective, many observers are saying the housing market has normalized amid the pickup in activity since the recession doldrums. But all is not well for people trying to buy–especially if they’re first-time buyers or on the lower end of the price spectrum. Here’s what you need to know to compete as 2015’s spring housing season swings into the home stretch.
Inventory is still short
“It looks like it’s going to be a very solid spring season,” says Lawrence Yun, chief economist for the National Association of Realtors. “The buyer traffic, the pending contract activity; there is enough buying activity. One constraining factor is the supply: there’s just not enough to satisfy demand and hence prices are getting bid up a little too high.”
At the end of April, the number of available homes for sale—both newly constructed and previously owned—was well below the six-month supply considered a balanced market: 5.3 months for pre-owned homes and 4.8 months for new ones, according to NAR.
Americans are buying more housing but the pace of sales hasn’t yet fully recovered to pre-recession levels. Still, Freddie Mac predicts that 2015 will be the best year for home sales and home construction since 2007, when home sales totaled 5.8 million. NAR forecasts that total existing-home sales for 2015 will reach about 5.24 million, or about 6.1% above 2014.
How to get to those higher numbers given the current inventory shortage? The good news is that more housing is coming down the pipeline. Housing starts (groundbreakings on new homes) hit a seven-year high in April, at an annualized rate of 1.14 million. That’s a lot better than during the recession, when housing starts fell below 1 million annually for six solid years. However, even April’s relative boom in groundbreakings is still low. Yun stressed that the nation needs 1.5 million new housing units per year to bring supply back in line with demand.
Owners with high levels of equity in their homes could help matters. More than 11 million homeowners are what RealtyTrac calls “equity-rich,” meaning that they have at least 50% equity stakes in their home. “Once you have at least 20% equity you can become that move-up buyer. You have enough to sell, pay all the fees, and still have something left to put into your next property,” says Daren Blomquist, vice president of RealtyTrac.
Prices are on the rise
Inventory constraints coupled with demand for real estate are pushing prices up. Historically since 1975, prices have risen (on an inflation-adjusted basis) about 1% per year, says David Blitzer, chair of the S&P Dow Jones Index Committee. As of the latest data available from March, single-family home prices are up about 4.1% year-over-year accounting for inflation, Blitzer says. That’s better for buyers than in late 2013 and early 2014, when the rapidly recovering housing market welcomed double-digit annual price gains (before inflation adjustment). But 4.1% is still faster than the historic, inflation-adjusted average.
In many markets, homes are selling at or above their list price. A recent survey by the National Association of Realtors indicated that in April, about 40% of homes, on a national basis, sold at or above asking price. Similarly, RealtyTrac recently found that in April 41% of homes sold at or above their estimated market value.
Of course, real estate is local, with markets varying widely. Homes in April sold for at least 101% of market value in 85 of the 315 counties nationwide with a population of at least 100,000, according to RealtyTrac. The worst places for buyers were San Francisco and Alameda counties in California’s Bay Area, where homes sold for 108% of estimated market value, followed by D.C., Forsyth County in the Winston-Salem area of North Carolina, and Yolo County, California where homes all sold for 107% of estimated market value. The best values for buyers were in Saint Louis, Mo., where homes sold for about 77% of estimated market value, followed by Baltimore, Md. (78%), Beaver County, Penn. (82%) in the Pittsburgh metro, Bartow County, Ga. (84%) in the Atlanta metro, and Chittenden County, Vt. (85%) in the Burlington metro.
Don’t expect the price gains to go away. Freddie Mac predicts an average home price gain of 4.5% in 2015 (on a national basis), while the National Association of Realtors is now forecasting that homes will rise by 6.7% this year.
Even with the price gains, buying is still better deal than renting in many cases. Nationally, it’s about 35% cheaper to buy than rent, assuming a 20% down payment and a seven-year stay, according to Trulia. “A lot of that is because rents are quite high in several of the major markets,” notes Ralph McLaughlin, housing economist at Trulia. “It’s a bit of a double-whammy for first-time homebuyers who may be wanting to purchase their first house. Even though it is a good time to buy because rents are quite high, it can make saving up for a down payment quite difficult.”
Competition is easing from investors
“For buyers the good news is in 2015 there’s less competition shaping up from investors in general,” says Blomquist. In the depths of the housing crisis, institutional investors were the big winners, snapping up single-family homes by the thousands. But they’re less of a force today. In Q1 2015, a total of 14,621 single-family homes were sold to institutional investors (defined as entities that purchase at least 10 properties per year), according to RealtyTrac. That’s about 3.4% of all sales, down from 6.2% a year ago, and the lowest share for institutional investors in four years.
Clearly, every market is different, but these days would-be homeowners face the stiffest competition from investors in Cape Coral, Fla., where 60.4% of transactions were investor purchases in Q1 2015. It’s almost as bad in Detroit, Mich. (60.4% investors), Sarasota (59%) and Lakeland (50.8%), Fla., and Columbus, Ohio (50.5%).
All-cash deals are also down: of non-owner-occupied buyers, 44.7% were all-cash, compared to 61% a year ago and also the lowest level in four years. All-cash buyers accounted for just 25.9% of single-family homes and condo purchases in Q1 2015, down from 30.3% in the prior quarter and a four-year low, according to RealtyTrac. Again, that’s good news for regular people, since a buyer who offers cash is likely to win a bidding war against a buyer with traditional financing.
Financing eases, but mortgage rates may rise
In the worst days of the housing crisis, it was tough to get credit. These days credit availability is at its highest level since the housing downturn, according to the latest read of the Mortgage Bankers Association’s Mortgage Credit Availability Index. Banks and mortgage companies have been easing their requirements and offering more types of mortgages. New VA offerings, jumbo mortgage products, and 203K home renovation loans have helped augment sources of financing.
But watch out: interest rates have stayed at historic lows for months now, and Freddie Mac is predicting increased volatility. This week, rates rose to the highest level in 2015, averaging 3.87% for a conventional (30-year, fixed rate) mortgage.
Lower-priced homes are moving fast
“Markets are moving slightly faster than they were last year,” says McLaughlin, of Trulia. “So it’s going to be a little more difficult overall for homebuyers to find a home that they want in a reasonable time frame.”
That’s particularly true for first-time buyers. Trulia analyzed the number of homes on the market across the nation and found that 60% of homes listed for sale on February 5 were still on the market two months later. In 2014, 62% of homes were still on the market from February to April. This year homes priced at the lower end of the market are moving quickest: only 50% of homes priced in the lower one-third were still on the market after two months, compared with 65% of higher-priced homes, Trulia found.
“If you were going into this housing season looking to buy a home, then No. 1, it’s going to be even more important to put in a competitive home offer,” McLaughlin says. “And No. 2, you’re going to have to have all your documentation sorted out so you can meet the closing time frames of closing on a house.”
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