Limited Equity Limiting Home Sellers from Entering the Market - CBS World News Roundup

underwater-econ-blogOver the weekend, you may have heard me on the radio on CBS World News Round Up.  There’s nothing better than some housing market commentary while driving your children to their sporting events or picking up groceries for the week, right?

Bad economist humor aside, the theme of our conversation remained why we believe the market dynamics are currently being driven by equity. The first-time homebuyer may be losing ground from an affordability perspective, but the majority of the market is existing homeowners. Uniquely, at the moment what is holding back sales is homeowner’s lack of equity.  If you are underwater, you can’t sell your home without bringing money, you likely don’t have, to the closing table. They aren’t listing their homes for sale in the first place.

 


If you are underwater, you can’t sell your home without bringing money, you likely don’t have, to the closing table. 


 

Based on our model of expected home sales we can simulate what would happen to existing-home sales based on changes in demographic, economic, and housing market trends.  A one percent increase in the year-over-year house price appreciation will increase the seasonally adjusted, annualized rate of existing-home sales by 186,000. Certainly, a consequential amount. With annualized house price appreciation rates hovering around 5 or 6 percent at the moment, the virtuous cycle between house price appreciation and increasing home sales is firmly in place.

Policy prescriptions aren’t necessarily the solution to the insufficient equity problem.  The market is healing itself and will facilitate sales as prices continue to rise.  Housing is still a good investment, especially if oneunderstands that you buy a house primarily for shelter, not as a get rich quick investment. However, housing does remain the primary source of wealth creation for most Americans, who get to lock in payments at a steady level for 30 years while also building equity through appreciation.

Listen to a clip from the broadcast: