Existing home sales slowed in the latter half of 2013 and have yet to pick back up. Many have asserted that this is due to low inventory. We have always argued that existing home sales inventory is completely a function of demand: existing homeowners need to be in a situation where they are willing and able to sell and exchange properties, hopefully as an upgrade, in order for existing home inventory to increase.
In a recent Economic Letter, the Federal Reserve Bank of San Francisco (FRBSF) identified two major causes for the slowdown:
- increased mortgage rates; and
- investor activity.
In case you’re not on board with the existing home sales slowdown, the figure below illustrates the regional sales volume trends over recent years. Note the precipitous decline in the Western region.
Chart courtesy of the FRBSF
You’ll notice the chart includes a variable titled, “Bernanke Testimony”. This signifies the first time Fed Chairmen Bernanke mentions the possibility of the Fed tapering its stimulus program. It was at this moment that bond market investors reacted negatively and interest rates jumped a full percentage point from 3.5% to 4.5%. They have remained at this elevated level even throughout the months following Bernanke’s statement when a taper did not occur.
Without doubt, flagging buyer purchasing power contributed to lagging existing home sales since the latter half of 2013. In addition to the interest rate spikes, prices continued to soar and wages remained stagnant — a treble blow to homebuyer demand.
But, as we’ve said repeatedly, it has ultimately been investors who have stalled existing home sales. Check out this statement from FRBSF economist, John Krainer, totally affirming our claims:
“Typically, existing home sales are dominated by buyers who intend to live in the homes they purchase. In the wake of the foreclosure crisis, however, a surplus of housing became available for sale at heavily discounted prices. Opportunistic investors bought up many formerly owner-occupied units at this time and converted them into rental properties.”
Existing home sales provide an exceptional barometer for the winds of the real estate market since they track both sides of the transaction. Typically a seller of an existing home goes on to become a buyer immediately, thus their willingness to sell is intimately linked to their desire to buy. The fact that existing home sales have remained stagnant speaks to the trouble in which our markets remain.