The “Vanishing” First-Time Home Buyer; What It Means for the Housing Market

Submitted by William Briat as part of our contributors program.

The “Vanishing” First-Time Home Buyer; What It Means for the Housing Market

Ah, the U.S. housing market, the so-called silver lining in the U.S. recovery—but not for long, as it may be rusting. The U.S. housing numbers are in, and they aren’t spectacular.

In the U.S. housing market, December existing-home sales rose one percent month over month at an annualized pace of 4.87 million units. Analysts were expecting December existing-home numbers to come in at 4.93 million. The one-percent increase also has to be taken with a grain of salt, as it was helped, in part, by a downward revision in November existing-home U.S. housing market sales to 4.82 million units. (Source: “December Existing-Home Sales Rise, 2013 Strongest in Seven Years,” National Association of Realtors web site, January 23, 2014.)

The December existing-home U.S. housing market sales of 4.87 million are also 0.6% below the 4.9-million-unit level recorded in December 2012. And sales of existing homes were down 27.9% at an annualized rate for the entire fourth quarter.

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First-time home buyers—the fuel of the U.S. housing market—accounted for just 27% of all purchases in December, down from 28% in November and October and 30% in December 2012. That’s a huge drop over the 30-year average of 40% and a number real estate professionals and economists consider ideal. It is also the lowest level since the National Association of Realtors began tracking this metric in 2008.

First-time home buyers, who tend to purchase lower-priced homes, are being pushed out of the U.S. housing market recovery by all-cash sales. All-cash sales accounted for a whopping 42.1% of all U.S. residential sales in December, up from 38.1% in November and 18.0% in December 2012. (Source: “Short Sales and Foreclosure Sales Combined Accounted for 16 percent of U.S. Residential Sales in 2013,” RealtyTrac web site, January 22, 2014.)

That represents an eight-percent month-over-month increase in all-cash sales and a 57% increase year over year. It’s not unfathomable to consider that soon, more than half of all existing-home sales in the U.S. will be in the hands of “flippers” (those who buy homes to renovate them and sell them for a profit).

It’s already a reality in Florida, where all-cash sales accounted for 62.5% of existing-residential home sales. Wisconsin was close behind at 59.8%, followed by Alabama (55.7%), South Carolina (51.3%), and Georgia (51.3%). (Source: Ibid.)

Institutional investors—those who purchase at least 10 properties a year—made up 7.9% of all U.S. residential sales in December, up from 7.2% in November and 7.8% in December.

In 2013, institutional investors accounted for 7.3% of all U.S. residential property purchases—up from 5.8% in 2012 and 5.1% in 2011. Over the last three years, institutional investors’ purchases have increased by 43%!

What about new-home sales in the U.S. housing market? Worse. Sales of new U.S. single-family homes fell more than expected in December(seven percent) to a seasonally adjusted annual rate of 414,000. Just like November existing-home sales numbers, November’s new-home sales rate was also revised downward, from 464,000 to 445,000. (Source: “New Residential Sales in December 2013,” United States Census Bureau web site, January 27, 2014.)

While all eyes will be on the Federal Reserve later this month to see if it tapers its monetary policy further, negative economic indicators, such as a weak housing market and high unemployment, point to a long-term low interest rate environment. This has the added benefit of meaning that well-heeled Americans can further monopolize the U.S. housing market. It’s kind of an economic catch-22 that benefits the wealthy.

Whether you’re a potential home buyer or you’re already on the property ladder, there’s still a number of different ways to capitalize on the housing industry. If you think the housing market is going to pick up, you could consider a home improvement retailer, like The Home Depot, Inc. (NYSE/HD) or Lowes Companies, Inc. (NYSE/LOW). However, if you think the housing market is going to disappoint, you could always consider shorting these stocks.

This article The “Vanishing” First-Time Home Buyer; What It Means for the Housing Market was originally published at Daily Gains Letter