Ask any professional involved in the real estate market and they will tell you that when interest rates are low, it’s a great time to buy. Lower interest rates mean higher affordability because mortgage payments are smaller.
In December of 2014, the 30-year mortgage rate tracked by Freddie Mac stood at 3.86%—the lowest since May of 2013. (Source: Freddie Mac, last accessed January 27, 2015.)
With mortgage rates in the U.S. economy at historic lows, one would expect the U.S. housing market to be robust, with plenty of buyers and rising home prices. But this isn’t happening.
First-Time Buyers Missing in Housing Market Rebound
When I study trends in real estate, I look at the number of first-time home buyers entering the U.S. housing market, as this indicator gives me an idea about where demand and prices may be heading next for housing.
First-time home buyers continue to be suspiciously absent from the current U.S. housing market. According to a survey by the National Association of Realtors, the number of first-time home buyers in the U.S. fell to its lowest level in 30 years in 2014. As per the long-term average, first-time home buyers usually account for 40% of all purchases in the U.S. housing market. In 2014, they accounted for 33% of all purchases—the lowest level since 1987, when first-time home buyers accounted for 30% of purchases. (Source: National Association of Realtors, November 3, 2014.)
Struggles in the U.S. Housing Market
Contrary to popular belief, overall demand in the housing market looks weak, too. In 2014, we saw a decline in the number of existing-home sales. Sales of already-built homes in the U.S. housing market amounted to 4.93 million in 2014—a decline of 3.1% from 2013, when 5.09 million homes were sold. (Source: National Association of Realtors, January 23, 2015.)
The number of new homes sold is stagnating as well. The chart below illustrates the number of new homes sold in the U.S. economy since 2005. The rebound for new-home sales has been pathetic.
Chart courtesy of www.StockCharts.com
As of November 2014, the annual rate of new homes sold in the U.S. housing market was 438,000, still down a million units from before the 2006 housing market peak.
Where Housing Prices Go from Here
I have been pessimistic on the U.S. housing market since last year, and looking at all the housing data being released these days, I’m not changing my tune. In fact, I expect the housing market in 2015 will not fare as well as it did in 2012 and 2013.
I am watching the U.S. housing market for two reasons.
First, home buying activity gives me an idea of where the average American Joe’s standard of living is headed. Home buyers shying away from buying homes tells me the average Joe is strapped for cash and can’t afford to buy a home, even when conditions (like historic low interest rates) are ripe for buyers.
Second, weakness in the housing market tells me where the U.S. economy may be headed, as slowing housing sales puts a damper on gross domestic product (GDP) growth. For 2015, don’t count on housing to help the U.S. economy.