Many people are wondering why the real estate recovery hasn’t been more robust. During the first quarter of this year, increasing interest rates, bad weather, lackluster economic and job growth, and limited housing inventory all worked against the real estate market. In May, existing home sales increased 4.9% from the previous month, and new homes sales surged 18.6%. With interest rates stable, good weather, and improving economic and employment numbers, is the real estate recovery poised to take off?

Not exactly. There are still a number of issues facing the housing market that may limit continued improvement.  Consider the following:

1.  Job Growth – Although the unemployment rate is declining, there has been little movement in the addition of skilled jobs, and income levels for those employed still remains low.  Additionally, many people that are employed haven’t been able to find full-time employment.  These factors are limiting the amount of income available for many families to buy homes. More people are renting than ever before.
2.  Household Formation – This is one of the greatest drivers of new construction.
3.  Home Price Appreciation – The recovery in home prices has been good for homeowners, but the more expensive homes are, the fewer buyers there are to qualify.  A small pool of buyers equals less demand, limiting future appreciation.
4.  Underwater Homeowners – There are still many sellers still waiting to sell because they owe more than their property is worth. As future price appreciation corrects this situation, inventory levels are likely to increase, which usually leads to slower home price appreciation. Many more homeowners could sell without losing money, but wouldn’t be left with sufficient cash to cover the down-payment for a new home.
5.  Credit Conditions – This subject is creating the greatest drag on the housing recovery.  Tight credit requirements have limited the number of perspective borrowers.
6.  Difficult conditions for Homebuilders – Many homebuilders are finding it difficult to secure lot inventory and labor. This has limited to choices for many people that would consider selling if new construction was an option.
7.  Future Interest Rate Increases – Even when things do improve, it’s not all good news for housing. As the economic recovery progresses, Federal Reserve policy will reverse, leading to higher mortgage interest rates as the Fed Fund Rate is allowed to increase.

 

Conclusion: The recovery in real estate that began two years ago, will continue as a gradual pace as opposed to posting strong gains.