Will used-house sales continue to rise?

The picture of the housing market painted by the mainstream media is that the housing market is recovering on strong sales and strong home price appreciation. People are going back to work, and using their new incomes to buy homes. Unfortunately, this rosy picture doesn’t reflect what’s really happening.

Sales are up because investors are buying homes. Owner-occupant sales activity is stuck at mid 1990s levels. The rise in prices is not due to surging demand. Instead, it’s due to a 50% decline in for-sale inventory causing the few active buyers to compete and bid up prices. There is nothing natural or sustainable about the manipulations of the market driving the current pace of sales and price increases.

Seven Takeaways on Rising Home Sales

By Nick Timiraos — June 20, 2013, 12:26 PM

Thursday’s report from the National Association of Realtors that existing-home sales in May rose by 4.2% adds to an upbeat market trend that has unfolded over the past two years. Here are seven takeaways on the sales data:

1. If you exclude November 2009, when home sales spiked amid a frenzy to claim a tax credit for first-time home buyers, home sales are running at their highest rate in six years. The National Association of Realtors reported on Thursday that sales in May rose to a seasonally adjusted annual rate of 5.18 million homes. They reached a level of 5.44 million in November 2009, and 5.27 million in May 2007, when the housing market collapse accelerated. They hit a low of 3.45 million in July 2010, after the last round of home-buyer tax credits expired.

2. Home prices continued to climb in May as more buyers chased fewer homes for sale. In fact, the continued ascent prompted Lawrence Yun, the Realtors’ chief economist, to warn: “The home price growth is too fast, and only additional supply…can moderate future price growth.” Median home prices were up by 15.4% from a year ago, which partly reflects the fact that the share of more expensive properties being sold has increased and the share of foreclosed-property sales has declined.

3. Home sales have posted year-over-year gains for the last 23 months. Sales in May were up by 12.9% from a year earlier, which was the largest year-over-year increase since October 2011.

These increases sound great, but considering the low we are rebounding from, eventually we were destined to see some improvement. For a little perspective, please consider that Orange County home resale volume very weak by historic norms.

4. Inventory is finally repopulating. The number of homes listed for sale rose by 3.3% in May, leaving 2.22 million homes available for sale. This is still 10.1% below last year’s May level, and many markets still favor sellers. At the current sales pace, there was a five-month supply of homes for sale on a seasonally adjusted basis. That’s up from a low of 4.7 months in January, but below last year’s level of 6.2 months.

Inventory is still very tight. As I recently reported, Housing inventory is up: Buyers aggressive, not stupid-aggressive.

5. The share of first-time home buyers is falling. Around 28% of all sales went to first-time buyers in May, down from 34% one year ago. The good news is that this might reflect the fact that there are more “trade-up” buyers and sellers, but the bad news is that it may also signal how investors are picking up the slack for buyers that can’t qualify for purchases because they don’t have enough savings, good credit, or the wherewithal to outbid cash buyers.

The bad news is that the deterioration in first-time buyers is NOT due to more move-up buyers. A move-up requires equity, and with nearly 50% of borrowers effectively underwater (see: Even with recent gains 44% of homeowners with mortgages still lack equity for a trade up house), the decrease in first-time buyers is caused almost entirely by an increase in investor sales.

6. Homes are selling briskly. The NAR reported that 45% of homes sold in May were on the market for less than a month. Half of all homes on the market in May had been listed for 41 days, down from 72 days for homes on the market one year ago.

Brisk sales would be a good thing if it were a sign of greater demand. However, we know the percentage of first-time buyers is at record lows, the move-up market lacks equity, and cashflow investors are pulling back because prices are too high. Given those circumstances, any increase in supply or any increase in borrowing costs (i.e. interest rates) will cause sales to not be so brisk.

7. The big wild card now is how buyers and sellers will respond to higher mortgage rates. The average mortgage rate in May stood at 3.54% for the 30-year fixed-rate mortgage. Rates have moved higher since then—to 4.17% last week, according to the Mortgage Bankers Association, and likely even higher since the Federal Reserve said on Wednesday that it could begin winding down its bond-buying program later this year. Rising rates will force buyers to reconsider how much home they’re able to purchase. To the extent home buyers have been able to swallow price increases this year, they’ve been able to do so because mortgage rates have been very low. Rising rates will change that dynamic.

Rising rates certainly will change the dynamic. Nationally, it won’t have a strong impact because most markets are still undervalued and quite affordable. However, Orange County and other coastal California markets have already reflated back to the market peak. Those markets will be hurt worse by rising rates because potential buyers simply won’t be able to pay the peak prices.

There are other takaways from rising sales.

8. Surging home sales raise new housing bubble fears. I’ve said before that I don’t believe we’re in bubble territory yet, but many are concerned about the possibility. That’s a good thing. Faith in home price appreciation is religion in California, but apparently many have lost their religion.

Sales will continue to rise

As I noted above, on a national basis, absent another recession, sales will continue to rise. If there is a canary in the coal mine foretelling problems from rising interest rates, it will be markets like ours. Coastal California will feel the impact of rising interest rates first, and its first manifestation will be a dropoff in sales volumes. Volume always precedes price. If interest rates rise high enough fast enough, it will pummel local sales volumes, and prices will need to adjust downward to reflect the new barriers to affordability.

$200,000 cash and four years squatting

Some terms of ownership were more rewarding than others. The former owner of today’s featured property paid $435,000 on 7/23/2003. He used a $348,000 first mortgage, a $65,250 second mortgage, and a $22,750 down payment.

His $22,750 down payment was parlayed into over $200,000 in mortgage equity withdrawal in seven trips to the home ATM machine over a three year period. He embodied all things Ponzi.

The house wasn’t done working for him when the ATM broke down. He quit paying the mortgage in late 2009, and he wasn’t booted out until May of 2013. He squatted for more than four years.

I wonder if he laments his misfortune…

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15042 COLUMBIA Ln Huntington Beach, CA 92647

$529,000    ……..    Asking Price
$435,000    ……….    Purchase Price
7/23/2003    ……….    Purchase Date

$94,000    ……….    Gross Gain (Loss)
($42,320)    …………    Commissions and Costs at 8%
$51,680    ……….    Net Gain (Loss)
21.6%    ……….    Gross Percent Change
11.9%    ……….    Net Percent Change
2.0%    …………    Annual Appreciation

Cost of Home Ownership
$529,000    ……..    Asking Price
$105,800    …………    20% Down Conventional
4.24%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$423,200    ……..    Mortgage
$102,507    ……….    Income Requirement

$2,079    …………    Monthly Mortgage Payment
$458    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$110    …………    Homeowners Insurance at 0.25%
$0    …………    Private Mortgage Insurance
$0    …………    Homeowners Association Fees
$2,648    ……….    Monthly Cash Outlays

($356)    ……….    Tax Savings
($584)    ……….    Principal Amortization
$161    …………..    Opportunity Cost of Down Payment
$152    …………..    Maintenance and Replacement Reserves
$2,021    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
$6,790    …………    Furnishing and Move-In Costs at 1% + $1,500
$6,790    …………    Closing Costs at 1% + $1,500
$4,232    …………    Interest Points at 1%
$105,800    …………    Down Payment
$123,612    ……….    Total Cash Costs
$30,900    ……….    Emergency Cash Reserves
$154,512    ……….    Total Savings Needed
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