The Buyer’s Market in Housing Is Over

You don’t usually find clearance sales on real estate. But the last two years are beginning to look like the deal of a lifetime for anybody who bought a home.

That dynamic may now be changing, as home prices surge by double-digits, interest rates rise and the whole housing bust recedes into the past. The latest sign that the buyer’s market is ending is a convincing improvement in foreclosures. Sales of foreclosed homes now account for about 12% of home sales, according to research firm FNC. That’s down from 17% a year ago and 37% in 2009, the low point of the housing bust. At the current pace, foreclosures will fall back to typical pre-recession levels within a year or so, signaling something like a return to a normal housing market.

That’s an important economic indicator that also has a tangible effect on buyers and sellers in the real world. An epidemic of foreclosures has been one of the factors pushing prices down to depressed levels and keeping sellers on the sidelines. With prices as low as they’ve been, many people who bought within the last five or even 10 years couldn’t sell their homes without taking a loss. That stunted the whole economy by preventing people from moving to better areas where there might be more job opportunities and discouraging first-time home owners from moving up to bigger, nicer homes.

With fewer foreclosures, there’s less of a discount on distressed homes, and firmer overall prices. In 2009, foreclosed homes sold for about 25% less than their estimated value, according to FNC. Today, they sell for about 8% less than estimated value. Since foreclosure discounts drag down prices on all homes, it’s no surprise that home prices fell sharply when there was a spike in foreclosures. Prices bottomed out in the first half of 2012 and are now rising by about 12 percent year over year, according to a variety of home-price indexes.

There’s some evidence now that trade-up buyers are finally, well, trading up. Sales of lower-priced entry-level homes that might typically appeal to first-time buyers are falling, possibly because new buyers are still struggling to get credit. But sales of higher-priced homes that would typically appeal to second- or third-time buyers are rising. “The recovery is partly driven by a rising presence of trade-up buyers who are in a position to take advantage of low home prices,” FNC’s recent report says.

This comes at the same time that mortgage rates have spiked from about 3.5% in April to more than 4.5% now. That obviously makes homes more expensive, but it might also spur more potential buyers into action, since waiting could expose them to even higher rates. The median sales price of a home, around $214,000, is now high enough for the typical seller to turn a small profit on the sale, which comes in handy for families that are turning around and buying another house. It might even offset higher costs that come with rising prices and higher rates.

That’s why the end of the buyer’s market isn’t the end of the housing recovery. If anything, it marks the return to a more rational market in which buyers and sellers both have some leverage. Among other things, rising prices ought to lure more sellers to put their homes up for sale, increasing the supply of homes and putting a check on rising prices. That seems not to have happened yet, but many economists expect it will soon.

Meanwhile, the Federal Reserve is closely watching the housing market as it considers whether to rein in in its easy-money policies, since housing is a huge part of the economy and can make or break a recovery. The Fed could have intervened over the last four months as long-term rates rose, and pushed them back down. But it was conspicuous in its choice not to, which suggest the Fed feels the housing recovery has enough momentum to withstand higher rates. A bit more of a seller’s market would make it official.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.