February’s home sales figures point towards a healthy, albeit normalizing housing market heading into the spring buying season. Existing home sales, which account for approximately 90 percent of the market, inched higher during February after slumping for two months. This market is largely bifurcated, however, as healthy demand in the lower price tranches offsets softening demand for high-priced homes. Buyers of luxury and high-priced homes are weighing the impact of fewer tax write offs and rising interest rates. States like California and New York, which have elevated tax obligations, are feeling the greatest pressure. According to a report from Douglas Elliman and Miller Samuel, real estate sales in New York fell by 25 percent in the first quarter and were at the lowest level in six years. Price for luxury apartments in Manhattan declined 15 percent and days on market have soared by 50 percent.
Entry level homes see intense competition between first-time homebuyers and investors. A lot of this competition is happening in the South and West regions of the country. According to the NAR, sales to investors constituted 15 percent of deals during February, on par with the rate last year. First-time buyers accounted for 29 percent of buyers, down 3 percent from one year ago and well below the long-term average of close to 40 percent. With such a consistently low number of first-time buyers, the homeownership rate isn’t expected to rise appreciably during this cycle. Pending home sales, which includes homes under contract but not closed, were up 3.1 percent in February. Coincidentally, existing home sales would need to climb 3.1 percent in March to match last year’s pace. We believe home sales will eclipse last year’s pace as buyers accelerate their purchase plans.
New home sales, meanwhile, were relatively flat last month. The largest concern surrounding the new home market is pricing. The gap between existing and new home prices last month was more than $85,000. Builders are doing little to relieve pressure on supply, and until market demand and pricing supports more entry-level home construction, developers are unlikely to play a role in altering the tight conditions prevalent at more affordable price points. Higher interest rates, meanwhile, will impact new home sales as the year progresses due to elevated pricing. Since the beginning of the year, the average 30-year rate according to Freddie Mac has increased approximately 50 basis points to the mid-4 percent range.
What does this mean for investors?
February’s sales figures offer investors mixed news heading into the spring buying season. Namely, competition will remain robust for homes that meet most investor’s criteria. Identifying and acquiring assets quickly and keeping options open for multiple properties will help investors be successful in the coming months. Buyers shouldn’t get easily discouraged when engaged in a bidding war. Additionally, buyers can still get favorable rates, but a return to last year’s cost of capital is unlikely. The Fed has indicated that three rate hikes are in order this year, including the most recent rise in March. Continued strength in the job market could bring a fourth hike into play, though we believe that scenario is unlikely. We do expect rates to continue to inch higher through the summer.
Investors that work with HomeUnion® can find investment opportunities that just hit the market or leverage some of our off-market deals. Hundreds of properties that fit any investor’s goals are accessible on our platform with new properties becoming available daily. After selection, we’re able to carefully manage acceptable pricing to prevent a competitive bidding climate from eroding returns. In terms of financing, HomeUnion® Lending can help you secure attractive rates for investment homes.