Existing home sales

Categories : Category Insights | Economic Indicators Published on : Jul 27 2017

The volume of sales is a key measure of demand and liquidity for homes, which are the single-largest asset for many families. Because homes can be viewed by consumers as an investment good (bought with the intention of reselling later for a higher price) as well as a consumption good (used for living in), rising prices can have the effect of actually increasing demand. This was the case in the housing bubble that lasted from 2001 until 2005, in which this effect was augmented by the perception of real estate as a safer investment than the stock market.

Consequently, the volume of existing homes sold peaked at nearly 7.1 million in 2005 and began sliding in 2006. As fringe beliefs about a potential housing bubble entered the mainstream, fewer Americans were willing to pay the still rising prices for homes. This transformed into a full scale collapse in 2007 and 2008. After the real estate bubble burst and defaults escalated, the value of properties, especially homes, dropped and banks and other lenders were required to write down the value of these properties. The rise of write-downs soon spread to the secondary market for debt, sparking a disastrous credit crisis; as a result, the US economy quickly sank into recession and a rise in the national unemployment rate shrunk the pool of individuals able to purchase a home. Furthermore, homeowners faced with prices that were significantly lower than the values just two years previous took their houses off the market rather than accept the low prices offered. Consequently, existing home sales plunged to 4.1 million in 2008, the lowest level in over a decade.

In 2009, home sales ticked up as a glut of foreclosed homes and dwindled savings forced prices down enough to entice buyers. This was supported by government tax credits for buyers, enacted to prop up home sales. Rather than stimulate new demand, the majority of these credits simply drove potential buyers to purchase sooner, setting the stage for a lull in 2010. This, combined with concerns about a potential double dip, caused existing home sales to slip 3.4% to just below 4.2 million in 2010.

However, starting in 2011, increasing per capita disposable income and historically low interest rates helped increase home affordability, which bolstered demand for new and existing homes. Another bright spot for the housing market has been the drop in mortgage interest rates, which were a response to actions taken by the Federal Reserve to reduce overall interest rates. To encourage lending and consumer spending, the US government has kept the federal funds rate, which influences lenders' borrowing costs, at or near zero since December 2008. This policy has also helped suppress the 30-year fixed mortgage rate and increase home affordability for consumers.

Over the five years to 2017, the number of existing home sales is expected to grow at an annualized 3.6% to reach 5.6 million. Moreover, existing home sales jumped 6.3% over 2015, having risen to their highest levels since 2006 and currently stand above their 10-year average. This trend is expected to continue over 2017, as existing home sales rise another 2.0% over the year.



Forecast

Over the five years to 2022, IBISWorld projects that home sales will rebound to 6.4 million. Growth in the housing market will be driven by steady anticipated gains in US employment and disposable incomes during this period. However, continued economic growth will ultimately force the Federal Reserve to keep on increasinga interest rates over the next few years, which will facilitate higher mortgage rates. While increased borrowing costs can potentially temper demand for homeownership and decrease the affordability of homes, mortgage rates are expected to remain low by historical standards. Moreover, as unemployment falls and incomes rise, more Americans will become eligible for mortgages and consider buying rather than renting. However, IBISWorld does not project sales to resume their prerecessionary pace in spite of these positive trends. This is because the prerecessionary level of activity was fueled by unsound lending practices and an unreasonable belief of ever rising prices. The memory of the deepest recession since the Great Depression should prevent these factors from reasserting themselves and fueling another bubble.


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