Existing home sales rebound, but first-time buyers face obstacles

Existing home sales rose 2.4 percent in December, but the share of first-time homebuyers remained worryingly low. Even as sales rise, constraints on affordability could prompt fundamental changes in the housing market as a whole. 

So far, signs point to a big year for the housing market in 2015. But the nature of this housing recovery, and lingering constraints on affordability, are prompting fundamental changes in where and how Americans choose to live.

The latest upbeat data comes in the form of existing home sales, which rose 2.4 percent in December to reach a 5.04 million annualized pace, according to data released Friday by the National Association of Realtors (NAR). That’s a big improvement from November, when sales dropped 6.3 percent to a 4.92 million rate. Sales last month were 3.5 percent higher than December 2013.

The improvement came despite an 11.1 percent dip in inventory to a 4.4 months’ supply of homes available for sale (about six months is considered normal). 

The report added to a spate of positive data suggesting that 2015 could finally be the year that the market, which has been sluggish since 2012, turns a corner. Housing starts, a measure of the number of new homes builders break ground on, also saw big gains in December, driven by a 7.2 percent surge in starts for single family homes. Homebuilders’ confidence in the market continues to improve, which should lead to more homes available for purchase. And foreclosure rates are down to their lowest level since 2006, just before the housing bust.

Price increases, too, are beginning to slow after a few years of double-digit growth. Home prices grew 6 percent year-over-year in December, according to the NAR. “That’s a lot better than the 12 percent increase we were seeing,” says Stephanie Karol, an economist with IHS Global Insight, in a phone interview. “That’s a lot more conducive to people being able to afford to buy a home.”

Those factors, combined with falling unemployment and (slowly) climbing wages should make for a market that is a lot more buyer-friendly, analysts say.

“I think 2015 will be big year for people making decisions,” says Daren Blomquist, vice president of foreclosure tracking and real estate data company RealtyTrac, in a phone interview. “People have seen housing do well long enough to make a decision to buy, sell, or build.”

He says certain groups of buyers and sellers who have been sitting out of the market since the bust may be ready to wade in, including people who lost their homes at the beginning of the housing bust and have been renting for the better part of a decade; retiring Baby Boomers who are looking to sell their homes and move on to new markets; and Millennial buyers who delayed their first purchases because of poor market conditions and unsteady job situations.

That last group is key for the housing markets’ success, and it remains a trouble spot: According to the NAR, the share of first-time buyers in the market was 29 percent for the second straight year, the lowest in nearly three decades.

But those who are buying homes are beginning to change the makeup of the national market with where they decide to put down roots. Priced out of the coastal cities like New York and San Francisco that have been top destinations for young adults for decades, first-time homebuyers are flocking urban centers of smaller cities, looking for a combination of good job prospects and affordability. “Portland and Seattle are some of the more obvious ones,” Mr. Blomquist says. “Denver is a place that has become unaffordable very quickly, but there have been some surprising pockets of growth, like Columbus, Ohio, [where home prices rose 5.4 percent last month] and Duval County,” the urban center of Jacksonville, Fla.

But overall, Ms. Karol says, the market still faces major obstacles in terms of affordability. One is quickly rising rents, which make it difficult for potential first-time buyers to save enough for a down payment on a home. And they need to save a lot, because borrowing in the current climate is tight.

“I’ve been concerned about the expansion of credit to people who need it,” she notes. Lingering memories of the housing crash, brought about by credit being too freely available, has led to a credit market that’s “overly tight and very cautious about any new measures." There is some movement in that direction: Last week, the Obama administration announced that the Federal Housing Administration will lower premiums on mortgage insurance. But Karol says the federal government could do more to make credit more available: “At this point, it would take a lot to get to a place where it’s dangerous.”