What are you looking forward to most this spring? For many, it’s the noise of chattering songbirds as you awake in the morning, the explosion of colors budding from plants and trees, and the cracking sound of a wooden bat as its path collides with an oncoming baseball.
In addition to watching my beloved Baltimore Orioles, I’ll also be keeping a close eye on the country’s housing market. Spring is historically a time when home sales start to increase heading into the summer.
This spring, the housing market will likely need more than warmer temperatures to encourage potential buyers to make the leap.
Current housing conditions for buyers
The housing market is in better shape after the haymaker it took during the Great Recession. An improving labor market and historically-low interest rates (think: lower monthly mortgage payments) helped 2013 home sales and prices surge to their highest levels since 2008.
However, a report released this week by Black Knight Financial Services revealed that mortgage origination volumes in February hit their lowest levels since at least 2000. Although the harsh winter weather may have played a role; home sales have been trending in the wrong direction since last summer due to slowly-rising interest rates and a surge in home prices.
Rising home prices are great for homeowners trying to recover the equity they may have lost on their home during the recession. Nevertheless, there are still millions of borrowers who owe more on their mortgages than their homes are worth and, as a result, are unable (or don’t want) to sell their homes and “move up” . This lack of sellers in the housing market has pushed down the inventory of homes on the market and driven home prices higher, thus “pricing out” many potential homebuyers.
One solution: more jobs and rising wages
People have to be feeling pretty comfortable and confident in their own financial position to buy a home. This usually means being employed. March’s labor report showed that 192,000 jobs were added; continuing the solid average of around 180,000+ per month. Notably, the report also showed that hourly earnings were unchanged in March, and earnings growth slowed from 2.2% to 2.1% on a year-over-year basis.
In addition to having a job, wages need to keep pace with rising home prices. According to the National Association of Realtors, home prices are projected to gain another 5-6% this year after an 11.5% jump last year. Home affordability will become an ever-larger issue if wages don’t keep up.
The gradually improving economy will likely increase jobs and wage growth in the months ahead. A continued rise in home values may give current homeowners the assurance they need to put their homes up for sale later this year. This will lead to a bigger inventory of homes on the market, fewer “bidding wars”, and a slowdown in the rise in home prices that leave some potential homebuyers on the sidelines.
With warmer weather and more homes for sale, nothing should prevent prospective homebuyers from getting out and finding the right home for them. After all, interest rates are still near historical lows.