The temperature of the real estate market is one that is constantly taken and analyzed every month. When prices and volume are up, it is seen as a sure sign that the rebound is fully underway and prices will immediately skyrocket. When there is any dip in these numbers, panic sets in and the fear of a market recession takes over. The reality is that there could be any number of reasons for a short term bump or dip including: seasonal adjustments, short term interest rate changes or policy adjustments. The reality is that if the real estate market truly wants sustained growth, it has to tap into the first time homebuyer market. To do that, employment and income numbers must grow accordingly.
The real estate market is very much a chicken and the egg scenario. On one hand, when home values and interest rates are low, they attract buyers. On the other hand, when buyers come out in mass, it creates greater demand. The biggest lesson from the real estate market crash is that buyers know they need to be comfortable with their monthly payments. The biggest force behind this is their stability in income and employment. If a potential buyer feels that there is minimal chance they will be fired out of the blue and their income can remain on an upward path, they will be more likely to buy. The problem is that for most buyers, especially first time buyers, their income is not in line with where property values are.
Most first time buyers are fresh out of college or young adults. Even though the job market has recovered, there is still a large gap between what a new employee makes and one that has been established at their field for years. The salary of a newer employee in most areas is not in line with where homes on the market are priced at. If a first time home buyer cannot comfortably afford the monthly payment on a $200,000 property, they will continue to rent until their income increases or values decrease. Changes in many of the loan programs that previously allowed for minimum down payment are gone or increased leaving these buyers to have to come up with more money down and an increased monthly payment. For many would be buyers, this means another year of renting hoping something changes in nine months.
With interest rates and values both coming off record lows, it would appear that both have nowhere to go but up. This will only increase the amount of down payment and monthly payment needed for approval, further knocking many would be buyers out of the buying pool. By the time their income increases, home values may very well have taken off again, leaving them chasing after properties.
The real estate market has made significant strides over the last few years, but unless a first time homebuyer group invades the market in full force, we will not see any sustained growth. This all comes back to buyer’s income and employment. If income is steady, they will come back. If not, they will be left hoping that mortgage program changes become available. After what lenders went through just five years ago, that does not appear very likely.