Rising Home Prices, Increasing Equity Spark Move-up Sales

RIS Media

27 June 2013

This week’s breaking news regarding the significant jump in April home prices – posting record monthly growth and the fastest year-over-year growth in seven years – is just the latest in a series of statistics confirming that the real estate market is primed for the return of home sellers, who are now financially able and emotionally confident to list their current home in order to move up to their next.

The April home-price increase data from S&P/Case-Shiller comes on the tail of a report from CoreLogic earlier this month heralding the return of positive equity for 850,000 more residential properties in the first quarter of 2013, another sign that move-up buyers will become an increasingly prevalent market segment in the months ahead. According to CoreLogic, the national aggregate value of negative equity decreased more than $50 billion to $580 billion at the end of the first quarter from 631 billion at the end of the fourth quarter of 2012.

“It is hard to know market by market exactly how extensive the return to positive equity is, but from published data it looks like the movement is spread across the country,” says RE/MAX, LLC Chairman of the Board and Co-founder Dave Liniger. “In 2012, 1.7 million homeowners who were previously underwater achieved positive equity and about half that number achieved positive equity in the first quarter of 2013. For every home price increase of 5 percent another 1.2 million will reach positive equity. It appears to be a widespread phenomenon and one that will benefit this inventory-starved market.”

According to Lennox Scott, home prices in the Northwestern U.S. reached bottom around November 2011. “At that time, a surge of local homebuyers regained buyer confidence to move forward with home purchases,” explains Scott, chairman and CEO of Washington state-based John L. Scott Real Estate. “Prices have seen double digit gains for homeowners in 2012/2013, thus bringing underwater homeowners into positive equity. However, there is still a ways to go before the majority of underwater owners see some relief.”

According to the CoreLogic report, the decrease in negative equity is driven in large part by an improvement in home prices. Tuesday’s S&P/Case-Shiller data reports home-price gains in 19 of 20 cities, with the 20-city composite index rising 2.5 percent in April, the largest monthly growth on record (data dates back to 2000). After seasonal adjustments, prices rose 1.7 percent in April. Compared with the same period in the prior year, prices in April rose 12.1 percent, the fastest annual pace since 2006.

While low interest rates have been fueling homebuyer demand and thereby, home prices, rates have been trending slightly higher in recent weeks. Some believe that higher rates could curb demand among some buyers, but most industry experts agree that increasing rates will serve to push many more buyers into action. As homebuyers continue to flood the market, fueling home values and homeowner equity, top brokers set their sights on the return of the move-up buyer.

“Recently, with the sudden rise in interest rates, up one half point, we have seen a mini power surge of sales activity,” reports Scott. “This is usually the case with sudden rate increases, however this time, we also saw an increased number of sellers bringing their homes on the market, so as to also be in a position to take advantage of rates before they continue to rise. The current market conditions are creating a high velocity of sales activity, keeping the inventory of homes for sale low. With the return of positive equity, previously underwater homeowners can now sell their home if the timing is right for them.”

According to Helen Hanna Casey – president of Howard Hanna Real Estate Services, serving markets in Michigan, New York, Ohio, Pennsylvania and West Virginia – “Positive equity has been increasing for several years throughout our markets. The pricing increases have been caused by many factors including an improved economy, decreases in refinancing at over-inflated prices, pent-up demand, lack of inventory and low interest rates.”

Casey reports that most move-up buyers in her markets are actually buying before they sell their existing home in order to take advantage of low rates. In order to facilitate this trend, Howard Hanna introduced the “Buy Before You Sell” program. As Casey states, “We are so sure of the increased equity that we are advancing the equity so they can move ahead. This should also begin to add more available homes to the market. Unfortunately, with so few homes available, move-up buyers are struggling to find the home of their dreams. We are also beginning to see an increase in new construction specs. This always helps push the market.”

While the evidence that the increase in positive equity is sparking homeowners to list their homes and move-up is still anecdotal to some degree, brokers believe this trend could soon ease the current housing inventory shortage in most markets.

“There probably aren’t any statistics to show how many people gained positive equity and then listed their home to purchase another one,” says Liniger. “But we may be starting to see an impact on the low inventory situation. Inventories have been dropping for several months, but now we’re starting to see those drops becoming smaller and smaller. It’s very likely that we’ll soon see the inventories turn around and start rising.”

Taking advantage of the impending growth in the move-up buyer segment will require real estate brokers and agents to review and adjust their current business strategies.

“The message we are delivering to our RE/MAX agents is that they have to re-engineer their strategies to be successful in this sellers’ market,” says Liniger. “It’s important that they educate their past clients and prospects about the dynamics of this market. Many homeowners have been afraid to enter the market, but they might not understand that if they wait, interest rates will rise and the price of their next home will be higher too. At the same time, smart agents understand that they are a valuable source of information and can provide critical impetus to uninformed homeowners.”

“All of our marketing is keyed into the message, ‘homes are selling and prices are going up’,” says Casey. “We are sharing data with our associates and clients who are the best media source of all. We have to assure they have the right message to share.”