A Perspective of the U.S. Residential Housing Market August 2014

As the Existing Home Sales numbers for the month of July reported by the National Association of Realtors (NAR) on August 21st suggest, we are seeing a continuation of the housing market recovery, with spring sales volumes finally being realized. While the fourth quarter of 2013 and the first half of 2014 saw a lag in activity, largely attributed to the harsh winter, lack of job growth and negative consumer confidence, we are experiencing a relatively continuous uptick in sales. We anticipate a robust second half of 2014 as housing inventories -- which were dangerously low at the beginning of 2014 at less than two months of inventory -- are now at five months of inventory. In the Chicago market, inventory has climbed the last four months, up from a low point in spring.

“We are pleased that our market has gained momentum throughout the second quarter and that the third quarter home sales are off to a strong start,” said Nancy Nagy, CEO of Berkshire Hathaway HomeServices KoenigRubloff Realty Group. “Locally, we are seeing prices continue to increase. Each community is unique, but the average for the entire area is about eight percent above last year. Buyers are motivated and the average time on the market for a home is about 21 days less.”

Michael Pierson, President of Berkshire Hathaway HomeServices KoenigRubloff Realty Group added, “We are positioned well to take advantage of a brisk fall market and expect 2014 to end on a high note. In the last few months, we have turned another corner, seller confidence is rising and we are seeing an increase in inventory.”

Key Influencers

A number of encouraging factors are helping to drive this more traditional buying and selling cycle. Consumer confidence, now at a six-year high, is a key influencer of the home buying and selling cycle. We are also noting a resurgence of consumers who are buying homes as their primary or even secondary residences, versus solely for investment. As well, more and more homeowners are the sellers of properties, as opposed to investors or banks dealing with distressed inventories.

Initially, the real estate recovery was fueled primarily by private equity and investors. And while that removed large blocks of distressed properties from the market, it was not a sustainable long-term model. The number of homes that are distressed is currently at a low point and has been at a steady decrease for the last 16 months. The more traditional cycle we are currently seeing is not only encouraging, but an appropriate recovery track.

Segmented Recovery

The latest analysis of the nation’s housing industry has also put a spotlight on the various segments of the market and how each is faring through the course of the recovery. While the luxury market has had strong sales recorded throughout most geographic regions, the mid-market continues to work through lower-than-peak values.

“The luxury market in Chicago and surrounding areas like the North Shore, DuPage and Harbor Country has been particularly encouraging,” commented Pierson. “Sales of homes over $1 million have grown 15-20% in key market areas.”

Still, prices across the nation are increasing, so in many markets negative equity is giving way to positive equity, meaning that fewer people are ‘underwater’ and enabling more people to sell their homes. At the height of the downturn, for example, we saw approximately 15 million mortgages nationwide with negative equity out of approximately 55 million total mortgages. Today, that figure has been reduced to between six to seven million mortgages, a more manageable volume.

“The Chicago market is much healthier now, as distressed properties have become a much smaller percentage of sales,” noted Nagy. “These now account for less than 20% of transactions. About two years ago, the banks were involved in about half of the deals in one way or another.”

First-time homebuyers continue to track at around 28% of home sales versus the historical average of 40%. A number of factors are impacting this market; among them, limited inventory, stringent credit standards, dramatic increase in student debt, the spike in FHA mortgage insurance premiums, and stiff competition from cash buyers.

Yet, while underwriting standards are more rigorous, we are seeing a positive trend as buyers are increasingly able to secure financing, particularly through the assistance of quality loan officers who understand and specialize in working through the loan process. We also note that beginning the search for a home already mortgage pre-qualified is more important than ever been before.

The Value of Homeownership

Areas of the country that suffered the most in the downturn, particularly Las Vegas, Arizona, South Florida, have seen a resurgence in sales fueled by international buyers from a variety of destinations including China, Canada, parts of Latin America and Europe, as the United States’ residential real estate market continues to be viewed as a prudent investment.

With the uptick in consumer confidence, increasing home values and other positive economic factors, the intrinsic value of homeownership continues its resurgence.

While a full recovery is potentially two to three years away, the trend-line is positive. Job creation and overall economic growth are necessary to continue fueling the market, which, as current activity indicates, we anticipate seeing more of in the year ahead.

About Berkshire Hathaway HomeServices KoenigRubloff Realty Group

BHHS KoenigRubloff Realty Group is a full-service real estate company that has nearly 1,500 real estate professionals and staff serving customers throughout the Chicago metropolitan area and surrounding communities. Formed from the merger between two legendary Chicago real estate brokerages – Prudential Rubloff Properties and Koenig & Strey – Berkshire Hathaway HomeServices KoenigRubloff Realty Group inherits a solid reputation built from decades of helping people throughout the greater Chicago area buy and sell real estate. The company is ranked #1 in luxury residential real estate sales in Chicagoland and is the leading firm in new construction in Chicago. Visit KoenigRubloff.com.