The housing market's steady recovery

Sellers, in particular, are in a strong position

Created date

June 23rd, 2017
Image of several hands being raised to buy a house.

The spring and summer months have always been the strongest periods for buyers and sellers in the American real estate market, but the 2017 season looks as though it will be especially good. Since the housing crash that brought home sales to a near screeching halt in 2008, the market has seen a series of ups and downs that, collectively, amounted to a slow and modest recovery.

In 2016 and into 2017, the Federal Reserve had been hinting that, with the ongoing economic upturn, the time had come to raise short-term interest rates from their eight-year record lows. Investors and analysts subsequently met with a subtle increase of a quarter-point, from 0.5% to 0.75%. 

As a result, the 30-year fixed mortgage underwent a slight downward adjustment. Whereas rates averaged 4.04% in February, they fell to 3.95% at the end of March. 

Forecasters expect it to be one of the strongest seasons ever. They predict existing home sales will reach 6.5 million units in 2017 alone.

And the big factor driving it all is inventory.

“For months, there has been a conspicuous shortage in houses for sale, pretty much around the country,” says Svenja Gudell, chief economist for the online real estate marketplace Zillow. “What’s significant is that the drop in inventory we had late this winter intensified in the spring.”

What that means is that there aren’t enough sellers to satisfy the buyers’ demands. While this trend exists throughout the United States, there are regions where it is acutely pronounced.

“Places like Minneapolis, Minn., have very tight inventory,” Gudell explains. “Comparing March 2016 to March 2017, they’re down about 24%, a considerable figure.” 

Next is Columbus, Ohio, then Buffalo, N.Y., and Seattle, Wash., the latter of which has an estimated 17% fewer listings compared to last year. 

As for the cause of this shortage, Gudell cites many factors. 

Driving the shortage

When Zillow measures inventory, it does so at three median price-points: high-end homes ($350,000-plus); average homes ($200,000–$349,000); and entry-level homes (under $200,000). Prices vary by location, but low inventory affects entry-level homes more than high-end. 

For one, a fair amount of homes within the entry level are still under water. That is, the owners owe more on the mortgage than their homes are worth, mainly if they bought during the housing bubble that had burst in 2008. 

People in this situation are less likely to sell.

Secondly, some owners have taken their houses out of circulation altogether after purchasing them for rock-bottom prices in 2011 and 2012 and turning them into rentals. Over the past decade, the quantity of rented single-family properties increased from 13% to roughly 20%—many of them in the entry-level bracket.

This also subtracts from the for-sale inventory. And as Gudell states, that equals opportunity for sellers.

“People who own a home in the entry-level bracket, and who aren’t under water or who don’t have a mortgage, are presently in a very strong position to sell,” she says. “Furthermore, price appreciation in this bracket is 10%.”

But on average, prices are going up across the board, no matter what kind of home you have to sell. 

In the last year, markets such as Oregon experienced an average appreciation of 12%; Washington, Colorado, and the District of Columbia, 10%; Michigan, 8%; and North Carolina, 6%.

Fierce competition

Gudell further notes that the essentially universal rise in home prices corresponds with much greater competition among buyers. 

“In Boston; Washington, D.C.; San Francisco; Portland; Seattle; and Denver, home prices are higher than they’ve ever been,” she says. “We’re already back to the home value peaks that we experienced in 2007—0.1% off, to be precise. Roughly a third of markets are either at their original peak levels or have surpassed them.”

In cities such as Seattle, Portland, Denver, and San Francisco, it’s not unusual for sellers to get between five and ten bids on a home, according to Gudell. In some cases, houses have brought sums in excess of their list prices.

“The bottom line is that sellers will be in a strong position for the entire summer,” she says. “We’ll continue to see home values rise as a result of a lot of demand because mortgage rates won’t do much in the coming months; and inventory will be much tighter than it has been in previous years.”