Is There Still Pent-up Demand for Real Estate?

Real estate sales in greater Lansing had a slow start this year and we were concerned that rising mortgage interest rates and shrinking affordability had finally cooled the very strong growth we experienced over the past two years. Of course we were sure having one of the worst winters in decades didn’t help. So was demand for housing shrinking or just being pent-up?

We were puzzled with the slow start because we knew the fundamentals of a strong housing market were good. Housing markets tend to do well when job prospects improve and very well when interest rates decline at the same time. Our local job picture is good and though interest rates are higher than last year, they have stalled at a very low rate from an historical standpoint. Also, with refinance activity declining, lenders were seemingly beginning to relax lending standards. Would potential buyers take the higher interest rates in stride?

We expected that the strong local economy would contribute to accelerated household formations. The Urban Land Institute issued a report earlier this year projecting that 4.48 million new households will be formed over the next three years and Millennials will make up a large portion of them. With an improving economy and the economics of buying versus renting clearly in the favor of buying, would more and more young people move out of their parent’s basements and choose to be a part of the American Dream of home ownership?

After two years of increasing average selling prices, were potential buyers losing faith in housing as an investment in an appreciating asset? We felt better when we read a recently released study by a national real estate company showing that 77 percent of consumers and 85 percent of Millennials have a favorable view of housing and 79 percent of people and 83 percent of Millennials believe housing is on the right track.

Were declining foreclosures and large investors’ loss of interest in rental housing putting a chill on the market? With the stock market at lofty levels, would individuals move out of volatile paper assets into income properties? We were encouraged when the Nobel Prize-winning Yale University professor Robert Schiller in a recent CNBC interview said, “There is a certain, substantial amount of momentum in the housing market-much more than in the stock market.”

So here’s what we know now.

The extremely bad winter did delay real estate transactions since many more people than normal waited until spring to list their homes for sale and house hunting was put off until spring.

Buyer confidence in the housing market is strong and traffic to the major property search sites and open houses is very high. Because the listing inventory remains below historical levels for this time of year, buyer activity has caused an increase in average price to a level higher than it’s been since 2007. The rise in average selling prices is stimulating some potential buyers who had been delaying buying to buy sooner, further heating up the market.

Cash offers from individual buyers of income property are common and the desirability of owning investment property remains strong.

The number of foreclosures and short sales are dropping as rising prices have moved more homeowners out of a negative equity situation. More homeowners can move on with their lives since they are no longer trapped in underwater mortgages, thus stimulating the market.

The rise in interest rates has not been a depressant to sales. The chief economist at Fannie Mae recently said: “Consumers have taken the interest rate rise in stride. Expectations for continued improvement in housing persist, and sentiment toward the current buying and selling environment is back on track.” Additionally, many lenders are relaxing their lending standards and more buyers are now qualified for a variety of mortgage products.

There are many indications that the real estate market in greater Lansing will thrive again this year. The pent-up demand will continue to be released throughout the summer and will continue to gain momentum as more and more people realize this is a great time to make their move.
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