Better weather and an improving jobs outlook likely pushed existing home sales upward in March, but foreclosures, tight credit and lingering unemployment continue to dog the housing market as it enters the spring selling season.
Home sales will rise 2.5% to a seasonally adjusted annual rate of 5 million when the National Association of Realtors releases its monthly report on Apr. 20, a consensus of economists polled by Bloomberg News predicted. That uptick would be welcome news after sales plummeted 9.6% to 4.88 million and median home prices hit a nine-year low of $156,100 in February.
The projected gains for March are not entirely indicative of a strengthening market. Because existing home sales measure closings—which typically occur one to two months after buyers and sellers sign contracts—February’s sales likely suffered from harsh weather in January. While spring is the most important season for home sales—when buyers are motivated by warmer weather and the desire to move homes before the start of the fall school year—the market is unlikely to achieve anything more than modest gains.
“The housing market is generally lousy,” said Jeff Silverbush, president of 21st Century Best in New York. “People are worried they might lose their job, or that their pay will go down. Until people start being employed at a higher level, it’s unlikely we’re going to see the market improve substantially.”
The economy added 216,000 non-farm jobs in March, but is still over 7 million jobs short of the peak employment reached in December 2007. Not only would improved job numbers increase the pool of potential homebuyers, it could also loosen the spigot on home loans.
“If the economy produces more jobs, the banks are going to feel more comfortable granting loans,” said Bernard Baumohl, chief economist at the Economic Outlook Group.
In addition to the jobs situation, foreclosures remain a persistent culprit in the housing malaise, raising fears that an influx of cheap homes will drive prices further downward, and creating an atmosphere in which many would-be buyers find it difficult to get home loans.
Although RealtyTrac reported that foreclosures fell 15% in the first quarter, many observers expect foreclosures to increase as lenders work through the backlog created by improperly processed paperwork.
And even with interest rates on 30-year fixed loans under 5%, the National Association of Realtors reported that 33% of home sales in February were all-cash transactions, indicating that buyers would rather pay cash than jump through the hoops required by lenders.
With potential buyers waiting for prices to fall or unable to get credit, Baumohl worried that home sales may remain slow for months to come.
“The market has created a logjam,” he said. “You can’t buy a new home until you sell your current home, and you can’t sell because prices are too low. On top of that, the banks are very wary of providing mortgages unless buyers have top-notch credit. We may end up seeing 2011 as a year in which the recovery of the housing market was delayed.”
But while job recovery has a long way to go, recent returns have been encouraging. The economy added 478,000 jobs in the first quarter, more than in any quarter since 2006, providing a glimmer of hope that the worst days for the housing market may be over.
“There’s no question that February was ugly,” said Russell T. Price, senior economist at Ameriprise Financial, who predicted existing sales would rise to 4.95 million. “But we’ve seen enough improvement on the employment front to think that housing may be stabilizing.”
Buyers won’t wait on the sidelines indefinitely, Price added. If the Federal Reserve ends its $600 billion bond-purchasing program—commonly known as QE2—as scheduled in June, the rise in interest rates that is expected to ensue could spur potential buyers to action.
“In terms of the long-term costs of buying a home, people who are bottom-ticking the market should be cognizant that mortgages won’t stay this cheap forever,” Price said.
But whether rising interest rates would drive sales is far from certain, Silverbush said.
“When you psychoanalyze the market, sometimes you’re right and sometimes you’re wrong,” he said. “I’d be afraid that if interest rates go up, that would be another impediment. But it’s hard to know until it happens. For now, the bottom line is that people are still afraid of this economy.”