Sales of existing homes jumped in March to their highest annual rate in 18 months, driven by improved buyer confidence that won out against tight inventory and high levels of “negative equity.”
Total existing-home sales — which refer to completed sales of single-family homes, townhomes, condominiums and co-ops — increased 6.1 percent to a seasonally adjusted annual rate of 5.19 million in March from 4.89 million in February, according to the National Association of Realtors.
Existing-home sales posted a 10.7 percent gain in March compared to a year ago, marking the highest annual increase since August 2013. March’s monthly sales increase reflected exceptional growth, representing the largest monthly pop since December 2010.
The elevated sales activity followed a quiet start to the year, said NAR Chief Economist Lawrence Yun in a statement, and reflects the impact of low interest rates and ongoing stability in the job market.
These market fundamentals are “improving buyer confidence and finally releasing some of the sizable pent-up demand that accumulated in recent years,” he said.
Total housing inventory climbed 5.3 percent month over month to 2 million existing for-sale homes in March, and is up 2 percent above a year ago.
But that increase masks a slight tightening of supply conditions in March. At March’s sales pace, existing-home inventory would have sold out in 4.6 months, down from 4.7 months in February.
That means buying conditions grew more competitive in March. Properties stayed on the market, on average, for 52 days in March, down from 62 days in February and 55 days a year ago, according to NAR.
Economists have long cited anemic inventory as a major obstacle to home sales. NAR has said that homebuilders need to construct more new homes to ease the inventory shortage and moderate the home price growth that’s making it more difficult for renters to buy, particularly would-be first-time buyers.
But the primary cause of lagging home sales — and constrained inventory — remains the large share of homeowners with “negative equity,” according to Mark Fleming, chief economist at First American, a title insurance and property data provider.
A homeowner has negative equity if they owe more on their mortgage than their home is worth. Such homeowners are also referred to as being “underwater.”
Based on market fundamentals, Fleming said existing-home sales should have posted a seasonally adjusted annual rate of 6 million in March, 800,000 higher than the sales rate reported by NAR today.
“Existing homeowners are the largest share of the existing-home sales market, and they can’t be homebuyers if they don’t have the sufficient equity to be home sellers,” Fleming said, explaining why negative equity is keeping the housing market from reaching its potential. “This is one of the key reasons we are observing tight inventory in many markets.”
Fleming bases the 6 million figure — what he calls the economy’s “capacity for annual existing-home sales” — on market fundamentals that traditionally drive existing-home sales: economic conditions, demographics (like population growth and household formation), interest rates and home price growth.
Nearly 17 percent of homeowners had “negative equity” in the fourth quarter of 2014, according to Zillow. Negative equity flattened between the third and fourth quarters of 2014, following 10 straight quarters of decreases, the listing portal reported.
That marked a “major turning point in the housing market,” Zillow Chief Economist Stan Humphries said in a statement.
“Negative equity, while it may still fall in fits and spurts, is decidedly here to stay, and will impact the market for years to come,” he said.
