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Rising Home Sales Prices Are Squeezing Affordability

June 6, 2016 | By

The spring selling season for the housing market kicked off with record-high prices for new homes. But how long will the surge last?

Data from a report released by the U.S. Department of Commerce on May 24 shows that the median selling price of new, single-family homes soared to a record $321,100 in April, up 9.7 percent from the same month last year. The median price for these newly constructed homes jumped by 7.8 percent between March and April of this year. The average sales price of these homes in April was $379,800.

New home sales are at their highest level in eight years, according to the agency. “An eight-year high in new home sales suggests the U.S. housing market is returning to more solid footing as we head further into the second quarter,” Lindsey Piegza, chief economist with Stifel Nicolaus, writes in a research note.

The seasonally adjusted sales volume for new homes in April was 619,000, which was the highest since January 2008.

A number of factors likely spurred housing activity in April, including positive gains in employment, favorable lending conditions and a “relatively stable” confidence level, according to Piegza.

Fannie Mae’s Home Purchase Sentiment Index shows overall consumer-housing sentiment has stayed relatively flat in recent months. The index, which increased 3.5 points to 83.7 in April, tries to capture how consumers feel about both selling and buying houses.

Existing Homes Are Selling Too

This spring, the pickup in homebuying hasn’t been limited to new homes. Sales of existing homes, which comprise the bulk of housing purchases, also rose in April. That number ticked up 1.7 percent to a seasonally adjusted annual rate of 5.45 million homes sold, compared with 5.36 million in March, according to the National Association of Realtors®. It was the second straight monthly increase for existing home sales, including single-family homes, townhomes, condos, and co-ops.

The median sales price for all types of existing homes was $232,500 in April, up 6.3 percent from a year earlier, according to NAR. April’s price increase is the 50th consecutive month of year-over-year gains.

Pending home sales also rose for the third straight month in April, reaching their highest level since February 2006, according to the association.

Low mortgage rates and “modest” seasonal inventory gains have encouraged more households to hunt for and buy homes, according to Lawrence Yun, chief economist with NAR. Yun says he expects mortgage rates to hover around 4 percent in the coming months, although inflation may cause rates to unexpectedly surge.

Consumer activity in the housing market varies widely by region. The Pending Home Sales Index in the Northeast climbed 1.2 percent to 98.2 in April, and is now 10.1 percent above a year ago. In the Midwest the index declined slightly (0.6 percent) to 112.9 in April, but is still 2.0 percent above April 2015.

Pending home sales in the South jumped 6.8 percent to an index of 133.9 in April and are 5.1 percent higher than last April. The index in the West soared 11.4 percent in April to 106.2, and is now 2.8 percent above a year ago.

While home sales may be on the rise, will increasing home prices exacerbate affordability for first-time homebuyers, such as younger purchasers? Already, in recent years the rate of young adults who are considered heads of households has fallen considerably, according to research by the Federal Bank of San Francisco.

Not Leaving the Nest

When it comes to housing, many Millennials are turning to their parents. For the first time in more than 130 years, adults ages 18 to 34 are more likely to live with their parents than with a spouse or partner in their own household, according to a study released on May 24 by Pew Research Center. More than 32 percent of young adults lived with their parents based on an analysis of 2014 census data, compared with 31.6 percent who were living with a spouse or partner in their own household.

The report’s authors, who didn’t study the effects of housing costs, tied the phenomenon primarily to the drop in the percent of Americans who choose to settle down romantically before age 35. Labor trends, such as both falling wages and employment for young men, have also contributed to the increase in young adults’ changing living arrangements, the report notes.

Lack of affordability, whether it has to do with wages or rising housing prices, may not be the only thing hampering some young adults from buying homes, says Danielle Hale, managing director of housing research with NAR.

“First-time homebuyers are typically not in the most competitive situation,” Hale says. “If there is a lot of demand for little inventory, they might be outbid by investors paying with cash or repeat homebuyers who are able to place a bigger down payment.”

Many young adults say the up-front cost of buying a home is the major barrier to ownership. According to Fannie Mae’s National Housing Survey published in May 2014, half of young renters cite affording the down payment or closing costs as the biggest obstacle to obtaining a home loan.

The issue of affordability, however, may be a misperception for some young adults. Although housing prices are rising faster than incomes, some young buyers aren’t aware of programs that allow them to purchase homes with lower down payments than they expect, Hale says.

Many young adults who opt out of buying may be missing the opportunity to build their wealth in their homes, she adds. “You build up equity and savings in your home, and that’s a significant source of net worth,” Hale says.

Estimates, forecasts, and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current, or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR Group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.




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