First-Time Home Market Heating-Up

Bill Fisher of ratewatch.com gives us some good news on the purchase market front and the economy.

This morning, the latest Pending Home Sale Report was released by the National Association of Realtors, which reported the highest index reading since April 2010. Buyers, you’ll recall, were hustling to take advantage of the soon-to-sunset homebuyer tax credit in 2010, so today’s reading is perhaps even more significant than it at first appears to be.

The figures seem to want us to realize that the real estate recovery has really gained traction and, though it still hasn’t pushed itself into high gear, it is moving ahead consistently at this point, and not treating us to much of the familiar go-and-slow of the recent past. Still, the solid 2% gain for January was as high as it was partly because the December data was revised down. But the gains are real: The Index is 8% higher for January 2012 than it was in January 2011.

This suggests improving sales volume for existing homes. More sales, perhaps, for new homes as well, though sales in this sector remain flat, lagging well behind improvements among existing home sales. The effect of rising numbers of real estate sales include a reinforcement of improving buyer psychology.

Thus, rising sales—assuming the increases don’t slip below the radar screens of potential buyers—tend to beget further increases to sales volume. Lawrence Yun, chief economist and economic cheerleader for the NAR, asserted that “job gains, high affordability and rising rents are hopefully pushing the market into what appears to be a sustained housing recovery.”

And this last point deserves further exploration. Rents are rising at an noticeably rapid rate in many of our nation’s real estate markets. According to Labor Department data, unadjusted for inflation, residential rents rose by 2.4% nationwide over the past year. One significant problem: Construction of new rentals units fell off dramatically in recent years, so that in many neighborhoods there just aren’t enough units available to meet the growing demand.

A meaningful source of demand for rental units is the “shadow market” about which we hear so much. Friends and relatives hunkered down in shared homes—empty nests refilled with members of the family—and people in the resulting overstuffed houses have been waiting rather impatiently for the chance to move into their own homes. (Most likely, the patience their hosts—often parents—has been challenged equally.)

Thus, there is a large pent-up demand for rentals, and few such homes and apartments have been constructed for several years to meet that demand. Some analysts suggest this rising demand for rentals may be the harbinger of a new trend in which rentals become more desirable than they were in the past.

I think instead that it is a harbinger of an improving market for real estate sales. G. Ronald Witten, a consulting firm, has computed that about 60% of recent job gains have gone to people who are 20 to 34. Many of these will be first-time buyers when they tire of having neighbors making the upstairs floors creak and playing their televisions too loud.

The American Dream, in other words, is far from dead. So it is reasonably likely that real estate sales will continue to move higher for the foreseeable future. No wonder major investment groups are buying up both rentals and the equity shares of big builders.

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