Introduction
After more than a year of trumpeting the so-called housing recovery, pundits are beginning to show signs of worry. Existing home sales are weakening, new home sales are dismal, and even the Case-Shiller Index is showing signs that prices are leveling off. The Fed’s new Chairperson – Janet Yellen – has expressed her concern more than once.
With all this anxiety, now is a good time to take another look at the true state of housing markets around the country.
The Basic Problem: Death of the Trade-Up Market
The pundits and Wall Street economists have not yet understood that this is the fundamental cause of the housing collapse. Let me summarize the problem for you.
During the roughly 50 years of rising home prices, the first-time buyer was the foundation of the housing market boom. This younger buyer would purchase a home which was smaller and less expensive than most houses. That would enable the seller to “trade up” to a larger, nicer home. These trade-up sellers would then buy and enable another trade-up buyer to do the same.
This trading up was possible because the seller almost always posted a profit on the sale of the house and could plow that into a more expensive home. When the bubble finally burst in late 2006, speculators dumped their properties on the market in metro after metro and prices no longer rose.
Listings soared and sales slowed down even in the hottest markets. Then prices began to decline. That posed a serious problem for the trade-up buyer. Many of them found that they had little or no profit with which to buy another home. A growing number found themselves “underwater.” Because they had put little or nothing down, the value of their home was less than the mortgage on the property.
Making matters worse was that after the sub-prime collapse in the spring of 2007, lenders finally tightened up their underwriting standards. They began to demand down payments as in the pre-boom days – 20% or even more. With little or no profit garnered from selling, would-be buyers could not come up with such a steep down payment. Nor could the first time buyer.
And so the trade-up game came to a screeching halt. It has never returned. You need to understand that it will not be coming back. Do I mean never? Not quite. My answer — not for a long, long time.
Were it not for all-cash buyers propping up the market in a big way over the last few years, prices would have crashed much further. Housing markets are still heavily dependent on the all-cash buyer. Take a good look at this very revealing table from Redfin. It covers 2014 through April.
The Awful State of Housing Markets in Connecticut
I live in Connecticut where we have access to the most detailed and up-to-date housing market statistics in the nation. The firm Raveis & Co. is the largest family-owned brokerage firm in the northeast with offices in six states.
