Housing Market and Near “Normal” Levels

Each day, real estate investors hear that the U.S. housing market is getting closer to “normalcy” as it continues a comeback from the worse downturn in the market since the Great Depression. This reading of the market is typically based on key housing market indicators, including new home sales, existing home sales, permits starts, distressed property sales — foreclosed homes and short sales– and other data.

In today’s market, home prices have been on a steady uptrend since. However, new mortgages have been at a standstill and people are wondering if the markets of yesterday will ever return.

Existing Homes Sales Up

Sales for existing homes climb 2.4 percent– the highest annual pace of 2014, or 5.15 million units. These transactions are for single-family homes, condominium, townhouses and coops. It marks the fourth consecutive month of increases. The pace is below the 4.3 percent below the 5.38 million-unit level from last July—the highest pace of 2013. Keep in mind that a lot of the activity—sales volume and price gain in many areas of the country– had to do with the bidding war that involved foreclosures.

Distressed Property Sales

This category of home sales, which the National Association of Realtors started tracking in October 2008, consist of foreclosures and short sale transactions. In July, they accounted for just 9 percent of total sales compared to 15 percent in July 2013. Sic percent of the transaction were foreclosure homes and 3 percent short sale deals. Lawrence Yun, the chief economist for NAR, said that this category is “beginning to fully heal.”
The decline in distressed sales has also been instrumental in rising home values. The high inventory of foreclosed homes 18 months ago was considered a major obstacle to the market recovery. In addition, foreclosures usually sold at a discount to comparable homes for the following reasons:

  • Require repairs
  • Vacant
  • Not staged
  • Banks motivated to sell

In July, foreclosed homes sold for an average discount of 20 percent below non-distressed residential transaction. Short sales had an average discount of 14 percent.

Benchmarks for Measuring Current Market

For real estate investors to understand the dynamic of the current market in terms of the “norm” it helps to look at the data for key indicators at the peak of the last real estate boom. Here are the most common indicators:

  • Existing home sales – Annual pace of 6.48 million units in 2006.
  • U.S. median home price – Record level of $230,000 in July 2006.
  • Months’ supply of for-sale homes – 6 to 6 1/2 months of inventory denotes a balanced market that favors neither sellers nor buyers.
  • Leading Market Indicator (LMI) – The LMI in January 2014 was 0.86—meaning that the housing market was at 0.86 or 86 percent of normal activity.

Whether you invest in foreclosures or non-distressed real estate, monitoring these benchmarks will help you gauge the health of the housing market, which can help you make better decisions.

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