Housing Recovery: Not here yet

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Buyers still wanted (Getty Images)

There has been a lot more talk recently about whether we are on the cusp of a housing market recovery. I wrote that I believed the housing market would rebound in 2011 back in December. Earlier this month, my colleague Bill Saporito wrote a story about how two developers who had called the crash correctly were now betting on a huge bounce in housing prices.

Well, the developers and others will still have to wait. The National Association of Realtors released their numbers on the housing market today. There was a glimmer of good news. Housing sales were slightly higher than analysts expected. And home prices were up from a month ago. But compared to where the housing market was a year ago, both housing sales and housing prices were down significantly. Homes sales were down 7% from a year ago. Prices dropped another 6%. The median price of US homes sold last month was $159,600, down from well over $200,000 at the height of the housing market.

Of course, this is the time of the year that one would expect to see a housing rebound. April showers bring May open houses. It takes a few months for housing sales to be completed. So it may be a few months before we know if the spring selling season was a rebound or a fizzle. But there is some reason to be worried. Here’s why:

Affordability is one thing that people who have been predicting a housing recovery have been keying in on. Indeed, NAR made a point of saying how cheap homes are these days when it released its March numbers on Wednesday morning. According to NAR,

the typical monthly mortgage principal and interest payment for the purchase of a median-priced existing home is only 13 percent of gross household income, the lowest since records began in 1970.

So why aren’t more people buying homes right now? Well, the NAR says the main reason for the drop from a year ago is the continued effect of the removal of the home buyer tax credit, which was available in March 2010 but has since expired. That’s part of the reason, but not all.

One telling data point from the latest housing report is the numbers on who the buyers are. In March 2011, the percentage of homes bought by first-time house buyers dropped to 33%. First-time home buyers made up 44% of all sales a year ago, helped by the tax credit. The surprising thing is that while home prices are lower than they were a year ago, the number of investors will to bet that the housing market has bottomed is not up that much. Investors accounted for 22% of home purchases in March, up from 19% a year ago. Considering that home sales overall dropped. That really isn’t much of an uptick. Just a few thousand homes across the entire US. With home prices so far off their peak, I would expect a bigger jump.

So who has been filing in the gap? People who already own homes. The percentage of people who were existing home owners buying a new home jumped to 45% in March, up from 37% a year ago.

This says something about what is driving the housing market. People don’t buy houses just because they are affordable. In fact, the driving force behind people buying houses still seems to be if they think housing prices will go up. That’s why you saw a big uptick in repeat buyers and not such a big uptick in investors or first-time home buyers. Repeat buyers don’t care if housing prices go up or down. They already own a house and will be affected by price swings whether they buy a new home or stick with the one they’ve got. It is the investors and first time buyers you have to watch to see if people think housing prices are set to rise. When prices do rise, that will draw more buyers back into the market.

So for a good predictor as to whether the housing market will rebound soon, perhaps the best indicator is not housing affordability, but first-time home buyers. This month’s data says, once again, the recovery is not yet in sight.

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