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August 29, 2014

3 Big Reasons Why Home Sales Are Falling

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3 Big Reasons Why Home Sales Are Falling

Existing-home sales dropped in November, falling 4.3 percent from October sales, and marking the first time in more than two years that home sales are below year ago levels, the National Association of REALTORS® reports. 

What’s behind the drop in sales? NAR’s chief economist Lawrence Yun pinpoints three main factors: Higher mortgage rates, constrained inventories, and continuing tight credit.

1. Higher mortgage rates: The 30-year fixed-rate mortgage is up nearly a full percentage point in the past year, causing home buyers to face an increase in borrowing costs. The 30-year fixed-rate mortgage increased to 4.26 percent in November compared to a 3.35 percent average in November 2012, Freddie Mac reports. 

The Federal Reserve announced this week that it would begin winding down its bond-buying stimulus program next month, which is expected to result in higher mortgage rates. The average 30-year fixed-rate mortgage could likely rise to 5 percent or 5.5 percent next year, Yun notes. 

2. Tight credit: New rules defining Qualified Mortgage will take effect soon, and could leave more borrowers on the sidelines. “New underwriting rules to protect borrowers, effective in January, will prohibit many loan features, set tighter limits on the amount of debt a borrower can have and still get a mortgage, and require that lenders accurately measure a borrower’s ability to repay,” says Steve Brown, NAR’s president. “This means that qualified borrowers are getting a loan that they are very likely to be able to repay, but some borrowers may wind up paying much more for their mortgage, or not get a loan at all due to the tougher standards. The new rules may tighten credit too much, but we’re hopeful regulators will make adjustments if this proves to be true.”

3. Constrained inventories: Housing inventory in November fell 0.9 percent to 2.09 million existing homes available for sale. The total housing inventory represents a 5.1-month supply at the current sales pace, NAR notes. One factor is a shrinking number of distressed homes – foreclosures and short sales. Distressed homes accounted for 14 percent of November sales compared to 22 percent in November 2012, NAR notes. 

“There is a pent-up demand for both rental and owner-occupied housing as household formation will inevitably burst out, but the bottleneck is in limited housing supply, due to the slow recovery in new home construction,” Yun notes. “As such, rents are rising at the fastest pace in five years, while annual home prices are rising at the highest rate in eight years.” 

The national median home price for existing-homes was up 9.4 percent year-over-year in November, averaging $196,300 nationwide. 

--REALTOR(R) Magazine Daily News and “What Fed Tapering Means to You,” The Wall Street Journal (Dec. 19, 2013) 

Read more: 

NAR Fact Sheet on the New Qualified Mortgage Rules

Fed: By End of 2014, Stimulus Will Be Over