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Where Are The Real Estate Buyers?

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The news on the real estate front is surely looking good. Compared with a year ago, prices are up, sales are higher, and yet more than a few people worry that today’s good news really signals little more than a short-term financial oddity.

“All signs point to a bubble,” says Fox News business reporter, Gerri Willis. “The government isn’t warning of a housing bubble because the housing numbers they survey when it comes to inflation aren’t home prices but apartment rents, called 'Owner’s Equivalent Rent.' What’s worse, the government figures this number using estimates from homeowners. Not exactly scientific.”

Willis is not alone. A Federal Reserve survey of bank officers found that “roughly three-fourths of respondents viewed either the outlook for house prices or economic activity as at least somewhat important factors currently restraining their bank’s RRE lending.”

Translation: Lenders are worried that property values might stall, or even fall, thus making home mortgages more risky.

The National Association of Realtors says existing home sales in March were 10.3 percent higher than a year ago, while prices were up 11.8 percent. These are great numbers, but can such a pace be continued? There are trends which suggest reason for concern: We seem to be missing homebuyers.

First, we simply have fewer homeowners. According to Steve Cook with the Real Estate Economy Watch homeownership today is down to a level last seen in 1995.

Second, despite the fact that mortgage rates are near record lows there’s no rush to buy personal residences. Roughly 75 percent of all current mortgages originations are to refinance properties, not to buy.

Third, investors are now a big part of the single-family real estate marketplace. NAR says 19 percent of all March existing home sales were made by investors; people who intend to rent or sell.

The term “bubble” has a certain connotation. It suggests that prices for a given commodity are grossly over-valued and will settle down to “normal” at some point, whatever normal might be.

Willis argues that we may have seen a bubble during the past year because of quirks in the way the government measures home values. But the existing home sale numbers we see also come from MLS figures. Such figures can have quirks — for instance, reported sale prices may not include seller discounts — but MLS figures have generally echoed national trends.

No less important, rising apartment rents suggest that we have a growing pool of potential buyers. If rents rise then some portion of all tenants will conclude that renting is less and less attractive and that ownership is the better deal. Such folks, if they can, will become owners. If you’re looking for missing buyers you can find a lot of them by just following the “apartment for rent” signs.

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