U.S. Housing Market: Few Buyers, Not Enough Sellers

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Paul Sancya/APA prospective homebuyer meets with a real estate agent at a house for sale in Grand Rapids, Mich.

By JOSH BOAK

WASHINGTON — Entering the 2014 spring buying season, the U.S. housing market faces an unusual dilemma: Too few people are selling homes. Yet too few buyers can afford the homes that are for sale.

“Both sides of the equation are in a funk,” said Glenn Kelman, CEO of the real estate brokerage Redfin.

A 13.4 percent jump in the average price of a home sold last year, according to the Standard Poor’s/Case-Shiller 20-city index, hasn’t managed to coax more homeowners to sell. And combined with higher mortgage rates, higher prices have made homes costlier for first-time buyers as well as for all-cash investors.

Average prices nationally are expected to rise by single digits this year. The gains could be strongest in areas with solid job growth, such as Seattle and Austin, Texas. And while construction will put more homes on the market, lack of affordability could keep sales flat to falling.

On the other hand, many lenders are easing the barriers for those with less-than-sterling credit. For these people, qualifying for a mortgage could become a little easier.

All of which leaves real estate, much like the rest of the economy, still trudging back to health nearly a half-decade after the recession ended. After last year’s growth spurt, the housing recovery may have begun an awkward adolescence, one prone to fits and starts that can defy predictions.

Here are five vital signs that will shape home sales this spring and the rest of the year:

Where Are the Sellers?

Good question. It’s slim pickings for a lot of would-be buyers. That brutal winter we just got through prevented many East Coasters from listing their homes in recent months. About five months’ worth of homes are on the market, compared with 5.9 months in 2012 and 8.3 months in 2011.

Housing supply previously fell toward the 5-month level during the height of the boom in 2006, when buyers snapped up homes faster than they could be added.

This time, fewer homes are being listed because 19 percent of owners are underwater on their mortgages — meaning the sales price wouldn’t be enough to repay their loan.

Still, warmer weather, job growth and a strengthening economy are expected to encourage more listings this spring.

“We’re all trying to figure out where the sellers are,” said Redfin CEO Kelman. “Everyone seems to be waiting until April or May or June.”

About 60 percent of Redfin buyers faced bidding wars in February, down from 73 percent at this time last year.

When few sellers emerged last year, prices for the limited number of homes available surged. Would-be buyers, facing a shortage of homes and locked in competition with one another, raised their offers.

Prices climbed in locales such as San Francisco, where a ton of money is chasing few properties and there’s not enough construction. Bay Area homes have surged 23 percent, on average, the past 12 months, according to the SP Case-Shiller index. That was faster than any other major metro area except Las Vegas, where much of the housing stock was rebounding from the depths of the recession.

This problem usually corrects itself. Higher prices should lure more sellers into the market who see an opportunity to cash out. That would then then lead to more listings and ease the face-offs among buyers. Sales data suggest that this has happened in Los Angeles, where more homes have been put up for sale, and they’re staying on the market longer.

But around the country, many homeowners are still reluctant to sell because they would likely lose money on the deal. The 2007 housing bust still haunts the market.

About 19 percent of homeowners owe more on their mortgages than their properties would sell for, according to the online real estate database Zillow (Z). An additional 37 percent are “effectively underwater”: Their sale profit would be too low to cover the cost of listing their home and putting a down payment on a new property.

Still, each mortgage payment repairs some of the damage and improves a homeowner’s equity. As home values grow further, more people will start to put their homes up for sale, and the supply should rise.

First-Time Homebuyers Not Back — Yet

After the Great Recession officially ended in mid-2009, many economists predicted that pent-up demand for homes would drive sales in the years to come. Not exactly. Nearly five years into the recovery, buying remains subpar.

Sales of existing homes are projected to total 5 million this year, according to the National Association of Realtors. That’s about 100,000 fewer than last year and far below the 5.5 million associated with healthy markets.

Much of that shortfall can be summed up simply: Too few first-time buyers. They bought about 1.5 million homes last year, about 500,000 fewer on average than they would have typically.

Last year’s price increases makes affordability a growing obstacle for first-timers, said Jed Kolko, chief economist for the online real estate firm Trulia (TRLA). Unlike current owners whose down payments come from selling a previous home, first-timers must amass a down payment. And higher home prices require more cash up front.

The situation is slowly improving for the 25- to 34-year-olds who would buy homes. About 738,000 of them found jobs in the past year. With more disposable income, more of them will move out on their own. Homebuilders have already ramped up apartment construction in anticipation of younger renters. That’s a critical first-step before they eventually buy a house or condo.

“I don’t think it will have a big impact on home ownership right away,” Kolko said, “because it will take some time for young adults to save and build a credit history to buy a home.”

Credit Standards Are Looser

You might have thought the economic meltdown would have shut off home loans to people with middling-to-weak credit. Yet something close to subprime borrowing has just started a comeback.

Wells Fargo is now offering mortgages to subprime borrowers with credit scores as low as 600, down from 640. (The median credit score for 30-year fixed mortgages had been around 730.) And non-bank lenders such as Carrington Mortgage Services are moving into that territory. Carrington has dropped its minimum credit score to 550. It’s a sign that lenders are becoming less tight-fisted after restricting credit in the wake of the financial crisis.

Lenders are accepting borrowers they once rejected in part because they’re hungry for more business after mortgage refinancing plunged in the past year as interest rates rose. The average 30-year fixed mortgage rate has risen about a percentage point to 4.4 percent from near-historic lows in May. A subprime borrower with a credit score of 550 would pay 7.15 percent, according to Carrington’s rate sheet.

Fewer Investors

Investors bought roughly one in every five homes sold last year, according to the National Association of Realtors. Most of them made all-cash offers and ignited bidding wars that other would-be homeowners lost. The investors’ properties became rehab projects or rentals.

But the 2013 price jump should cause investors to play a lesser role this year. Areas that suffered the most during the recession’s housing bust, including Phoenix, Las Vegas and Tampa, have seen prices rise. They’re no longer the bargains that investors considered them to be a year ago, said Zillow’s chief economist Stan Humphries. The result is that bidding wars won’t likely be as fierce in 2014.

Not all investors are disappearing. They’re pursuing areas where homes can most easily be converted into rentals and deliver higher returns. Home prices in Cincinnati, for example, rose an average 2 percent last year, but rental prices jumped 10 percent. Similar trends can be seen in the Midwest.

Higher-End Homes Are Hotter Investments

It’s better to be on the luxury side of the real estate market for the moment. Prices generally rise faster than at the lower end. And buying activity has increased in the past year.

Sales of homes worth more than $1 million rose 14.4 percent over the past 12 months, according to Bank of America Merrill Lynch (BAC).

By contrast, sales of properties valued at less than $100,000 dropped 18 percent. A key reason: Fewer foreclosed homes are being listed.

Prices for more expensive homes have also risen much faster, according to Zillow. The online real estate firm divided the U.S. housing stock into thirds based on price. Homes now worth $305,700 or more — the top one-third of the market — rose in value annually at a 3.38 percent average during the past 18 years. Those prices grew 20 percent faster than did the bottom two-thirds of the market.

“Essentially, it’s a tale of two markets,” said Zillow’s Humphries. “Your experience as a top-tier homeowner was substantially different than for a bottom-tier owner.”

AP Business Writer Joshua Freed in Minneapolis contributed to this report.

  • Year-over-year gain: 21.5%

    Median sale price, Jan. 2013: $224,450

    Median sale price, Jan. 2014: $272,750

    Residents enjoy hundreds of nearby hiking trails, as well as indoor culture at the Fine Arts Center and the Colorado Springs Philharmonic.

    Northwest Colorado Springs, Colorado Springs, Colo.

  • Year-over-year gain: 22%

    Median sale price, Jan. 2013: $318,375

    Median sale price, Jan. 2014: $388,500

    This neighborhood, bounded by the Schuylkill River and 20th Street, and by South Street and Christian Street, was viewed as a slum in the 1970s, when Philadelphia’s Redevelopment Authority took over abandoned properties.

    Schuylkill Southwest, Philadelphia, Pa.

  • Year-over-year gain: 24.2%

    Median sale price, Jan. 2013: $516,450

    Median sale price, Jan. 2014: $641,500

    Magnolia covers 4 square miles, making it the second-largest Seattle neighborhood by area. It features a lighthouse built in 1881 and is home to Seattle’s largest park, at 534 acres.

    Magnolia, Seattle, Wash.

  • Year-over-year gain: 32.1%

    Median sale price, Jan. 2013: $210,446

    Median sale price, Jan. 2014: $277,898

    Paradise Valley, in the heart of the Scottsdale-Phoenix area, gets an average 294 days of sunshine a year — hence, the more than 200 golf courses.

    Paradise Valley, Phoenix, Ariz.

  • Year-over-year gain: 32.2%

    Median sale price, Jan. 2013: $344,750

    Median sale price, Jan. 2014: $455,835

    The Washington Post listed Sunset Hills among “the shortest commute” category of Virginia neighborhoods, with an average commute time of just over 21 minutes. And Dulles International Airport is about six miles away.

    Sunset Hills, Reston, Va.

  • Year-over-year gain: 44.5%

    Median sale price, Jan. 2013: $247,735

    Median sale price, Jan. 2014: $357,900

    This once-seedy area has become hot in recent years. It’s packed with art galleries and chic retail shops, as well as new upscale bars and restaurants next to venerable family-owned cafeterias.

    Wynwood/Edgewater, Miami, Fla.

  • Year-over-year gain: 46.9%

    Median sale price, Jan. 2013: $284,750

    Median sale price, Jan. 2014: $418,250

    Brighton, once the center of New England’s cattle trade, is in the northwest corner of Boston, on the Charles River. The Brighton Branch Library is Boston’s first renovated LEED Green Building. The Brighton Police station is shown here.

    Brighton, Boston, Mass.

  • Year-over-year gain: 47.5%

    Median sale price, Jan. 2013: $223,175

    Median sale price, Jan. 2014: $329,100

    South Loop joins a number of other once-blighted neighborhoods on this list that have been redeveloped and are now hot. The site of former rail yards, it was known for many years more for its vices (as in brothels, burlesques) than its residential virtues.

    South Loop, Chicago, Ill.

  • Year-over-year gain: 48.7%

    Median sale price, Jan. 2013: $241,000

    Median sale price, Jan. 2014: $358,450

    Also: Fairgrounds, San Jose (41.4%); La Jolla, San Diego (40%); Woodland Hills, Los Angeles (37.5%); Southwest Anaheim, Anaheim (35.2%); Berryessa, San Jose (34.4%).

    Newhall, the southernmost and oldest district of Santa Clarita, was the first permanent Anglo settlement in the valley. Ranches-turned-film studios dot the area, including the Melody Ranch, which was once owned by Gene Autry. The ranch hosts the annual Santa Clarita Cowboy Festival.

    Newhall, Santa Clarita, Calif.

  • Year-over-year gain: 48.8%

    Median sale price, Jan. 2013: $504,250

    Median sale price, Jan. 2014: $750,275

    This is the most affluent neighborhood in Charlotte; the median income is $79,737, according to Zillow. That compares with a median of $46,975 for Charlotte. A high point of the area is the Duke Mansion, built in 1915 by tobacco magnate James Buchanan Duke.

    Myers Park, Charlotte, N.C.

  • Year-over-year gain: 57.4%

    Median sale price, Jan. 2013: $167,450

    Median sale price, Jan. 2014: $263,615

    People who live here, according to classifications Zillow uses to characterize residents, are likely to be: Corporate Climbers, Multi-lingual Urbanites or in a category called “Bright Lights, Big City,” which Zillow uses to describe “singles ranging in age from the early 20s to mid-40s who have moved to an urban setting.”

    Buffalo, Las Vegas, Nev.

  • Year-over-year gain: 97.3%

    Median sale price, Jan. 2013: $668,250

    Median sale price, Jan. 2014: $1,318,301

    New York City’s 92-acre planned community includes areas built on more than 3 million cubic yards of soil and rock, some of which was excavated during the construction of the World Trade Center.

    Battery Park, New York City, N.Y.

  • Bloomberg ranked neighborhoods in U.S. cities based on the year-over-year increase in median home sale prices from January 2013 to January 2014. Percentage increases were based on Zillow calculations of median sale prices of all home types and calculated only for neighborhoods with at least 10 sales per month. Only neighborhoods with median home sale prices of at least $250,000 in January 2014 were included. Data were rounded.

    Related real estate rankings:

    Most Expensive Home Prices: U.S. Neighborhoods

    Priced Out: Where Higher Rates Could Hurt Homebuyers The Most

    Methodology

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