Why are buyers not buying?

While July’s home sales figures took many by surprise for its sharp plunge–a whopping 27% from June to July and the largest in over 10 years–the figures were exactly what I was expecting.

It is clear that buyers are not buying, but why?

Probably the biggest factor is the job market. Unemployment figures continue to hover around 10%, and many businesses are unwilling to hire right now for various reasons. The impact of new health care costs, the possibility of higher business taxes, and the lowering of consumer confidence, all create a wait-and-see atmosphere for businesses. Many potential buyers have lost jobs or have taken pay cuts which prevent them from qualifying for mortgages. Buyers that have jobs are fearful of committing to a 30 year mortgage payment when their job future appears to be questionable.

While the tax credit seemed to be a good idea at the time, in hindsight it appears that the tax credit simply pulled all future purchases forward. Those buyers that were considering buying over the next year or two simply moved their time frame up so that purchases that would have been spread out over a 12-24 month period were condensed in to a 9 month period. In my opinion, the effect that this had was to artificially inflate prices and demand during this 9 month period. After the tax credit expired, there simply were no more buyers. Anyone that was going to buy, already had.

Today, buyers are hearing that mortgage rates are at historic lows and are likely to go down even more. They are also hearing that the housing market is either in a double dip or will enter into a double dip. Buyers are not in a hurry to buy because they think they will get a lower interest rate and/or purchase at a lower price if they wait.

I work with both buyers and sellers. As a result, there are certain trends that I am starting to see. During the months that the tax credit was in place, there was a surge in buyers and a coinciding decline in housing inventory. The surge in buyers was obviously due to the tax credit. The decline in housing inventory was largely due to two factors: banks unwilling to flood the market with too many properties for fear that it would cause values to decline even more and the moratorium that was put on foreclosures in the beginning of 2009. Because banks were not foreclosing on homes for that 3-6 month period, there were fewer homes in the foreclosure sales pipeline while the tax credit was in place. We found ourselves in an expected eye of the storm–a small pocket of time where buyers were actually competing for properties. This caused prices to go up, sales to surge, and many–most importantly, sellers–to feel that the worst was behind us, and normalcy had returned.

Normal sellers started to return to the market–hoping to take advantage of the active real estate market–but many waited too long. Now inventory is growing as a result of these new sellers, but their expectations are based on conditions that no longer exist: tax-credit-induced buyers and low inventory. Foreclosure inventory has also started to grow: the result of banks once again processing foreclosures both because the moratorium is no longer in place and because loans modified under the Making Home Affordable loan modification program are failing to reach permanent status. Buyers are once again unwilling to buy in a declining market unless they see a deal that is too good to pass up. Sellers haven’t quite figured out that market conditions have dropped off the cliff once again so they are unwilling to list their houses for prices that will attract today’s buyers.

So where do we go from here?

It appears to me that every program that has been thrown at the real estate market has simply prolonged the inevitable. The tax credit did not revive the housing economy; it simply pulled demand forward and created unrealistic expectations on the part of sellers. The Making Home Affordable program ignored two important facts: many home owners were defaulting on loans because they couldn’t afford the loan–having lied to qualify for the loan in the first place, and home owners were unwilling to pay for a house, no matter how attractive the terms were, that would never regain positive equity in their life time.

I would like to see the real estate market allowed to run its course naturally. I know this means that in the short term existing home owners will lose even more equity than they have already lost, but I think in the long term this is the only way for values to truly level out to levels that can be sustained by the current economy–levels where today’s buyers are willing and able to purchase. Fear of sustained or growing unemployment, pay cuts, tightening credit, and rising down payment requirements are make it harder for today’s buyer to purchase.

The real estate market might have been the cause of this economy, but it is now the effect. Instead of putting bandaids on the effect, we should be curing the cause–the economy as it affects the job market.