Existing home sales in March were solid – but observers are paying close attention to increasing home prices. If prices rise too much it is feared that the market could push buyers — especially first-time homebuyers — out of the market. The result would be slowed property sales and an adverse effect on the demand for properties “flipped” by investors.
According to the National Association of Realtors, March home sales increased to the highest levels seen in 18 months, increasing to a seasonally adjusted annual rate of 5.19 million. Low inventory, though, could over time push prices up – which might deter buyers who were just recently tip-toeing back into the market.
NAR Chief Economist Lawrence Yun noted that the median price of homes sold rose 7.8 percent on an annualized basis. He highlighted the risk of home price gains surpassing the increase in incomes, as some home buyers may not be able to purchase homes in this price climate.
The median home price was $212,100 in March – the 37th straight month that prices rose year over year, and the biggest jump since February 2014.
Concern Over Low Housing Inventory
While March existing home sales were a welcome change compared to the sluggish growth during the winter months, NAR’s Yun said that the sales pace going forward may depend on whether there is a concurrent rise in housing inventory.
"For sales to build upon their current pace, homeowners will increasingly need to be confident in their ability to sell their home while having enough time and choices to upgrade or downsize," Yun said. "More listings and new home construction are still needed to tame price growth and provide more opportunity for first-time buyers to enter the market."
Total housing inventory did expand in March. Approximately 2 million existing home were listed for sale, a number that is 2 percent higher from a year ago.
If new home construction picks up, some of the upward pricing pressure might be alleviated. Builders are optimistic, in fact, about expanding construction to meet demand, according to the National Association of Home Builders. The NAHB/Wells Fargo Housing Market Index grew four points in April to reach 56, indicating that builders believe market conditions are good (any number over 50 indicates that more builders view conditions as good, rather than poor).
"The HMI component index measuring future sales expectations rose five points in April to its highest level of the year," said David Crowe, chief economist for the NAHB. "This uptick shows builders are feeling optimistic that the housing market will continue to strengthen throughout 2015."
Existing Home Discounts — an Opportunity for Flippers
Interestingly, new home prices are now far outpacing those of existing homes. New homes generally command a 10% to 20% premium over existing houses because new construction tends to be of higher quality and have more up-to-date amenities. Recently, however, the premium over existing homes has widened to nearly 40%.
Some of this widened premium can be explained by the changed “mix” of new homes in the price spectrum in the aftermath of the Great Recession. Although homes costing less than $300,000 still hold a slim majority of all new homes sold, the growth sector has been in more luxurious residences. Homes costing $500,000 or more accounted for almost 11% of new homes sold in 2014, up from 8% in 2011.
If the price differential between new homes and existing homes reverts over time to historical levels, then active investors looking to renovate existing homes may see an opportunity. Even if consumer preferences lean toward new homes, at some point the price differential may become unsustainable, and homebuyers may start to better appreciate the discounted pricing available in the existing home market.
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