Is Real Estate Headed For Another Plunge?

Is Real Estate Headed For Another Plunge?

Tampa & Sarasota, FL

Tampa & Sarasota, FL

By Matthew Frankel via Motley Fool

Traditionally, the summer months are the peak time of year for home sales. With children off from school, it’s easier for families to house hunt, pack up, and move, without disrupting their lives too much. In fact, about 50% of all home sales occur during the summer months, according to Realtor.com.

If this is the case, than why are sales of new homes plummeting? Inventories of new houses are up, but sales are dropping at double-digit percentages from the same time last year. Maybe the real estate market recovered too far, too fast, and now it’s due for a pullback.

The data doesn’t look good

Home sales are down pretty much across the board. New home sales suffered the worst, with sales down 8.1% from May’s numbers, and far off from what economists had expected. In June, new homes sold at an annual pace of about 406,000, or more than 15% less than the 480,000 pace that was expected.

While new home sales are a relatively small part of the market, the bad news doesn’t stop there. Pending home sales, which are an excellent short-term forward indicator, fell 1.1% in June and are 7.3% less than they were a year ago. In other words, just as the summer heats up, sales are actually falling. This should be very disturbing news for real estate professionals as we head in to the “peak” selling season.

And finally, mortgage applications dropped 2.2% in last week alone. While a lot of this is due to a drop in refinancing activity, mortgage applications to purchase homes barely moved, rising just 0.2%. This is simply an anemic pace for this time of year, especially considering the damper put on sales activity by the harsher-than-normal winter.

A combination of factors

So, where have the buyers gone? Why is this summer not seeing the selling activity you might expect?

Well, for starters, houses are a lot more expensive this year. Since hitting bottom in early 2012, the average home value in the U.S. has increased by 27%. And just since last year at this time, home values have risen by nearly 9%.

While homes have gotten much more expensive since the financial crisis, people aren’t making a whole lot more money. The latest data shows just 2% wage growth over the past year, virtually identical with the rate of inflation. And the rate has been stuck between 1.5% and 2.25% since the end of the crisis.

The combination of higher prices and slow wage growth has simply made homes much less affordable to millions of people.

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