Seven years ago, the real estate market in the U.S. collapsed from underneath itself. Seven years is a long time. For the average American today, that's about 10% of your life.
After all that time, though, the real estate market still hasn't fully recovered. The Case-Shiller Home Price Index Composite 10 remains about 20% below its 2006 highs.
Even worse, home prices have turned downward once again so far in 2014. Is this the beginning of a triple dip, or is there something else at work? To figure it out, let's break down the fundamentals driving the market.
Where's the bottom?
We thought we hit the bottom of the market in 2009. That turned out to be premature, as the market rebounded only slightly before falling to a new low in early in 2012. Today the market has rebounded strongly from that low but has once again turned south.
Case-Shiller Home Price Index: Composite 10 data by YCharts
The broader economy
The real estate collapse in 2007 was exacerbated by a fundamentally weak economy. Unemployment spiked, GDP fell into a tailspin, and the stock market collapsed around the financial crisis.
Today, though, the economy is stronger than it has been since the recession ended. Second-quarter GDP was recently revised upward to a 4.6% annualized growth rate, the unemployment rate is below 6% and declining, and consumer spending data continues to improve.
In some locales around the country -- including Austin, Texas; Nashville; and Charlotte, N.C. -- local economic strength is translating to a strong real estate market.
U.S. House Price Index data by YCharts
In general, though, these economic improvements have not yet translated into a robust real estate market. Hidden forces are masking an otherwise healthy market.
How healthy? U.S. foreclosures and delinquencies are down considerably. New homes sales increased over 7.2% on an annualized basis so far in 2014. In most metros, inventories remain low -- and that low supply should continue to support increased prices.
U.S. Consumers With New Foreclosure data by YCharts
Hidden forces
Why, then, with all this rosy economic data and hidden strength in the real estate markets, are we seeing the price declines?
The primary driver is that investors who purchased homes at rock-bottom prices several years ago are now leaving the market.
The percentage of all cash home purchases -- a very strong indication of investor activity -- declined by six percentage points in August to 23%. With those investors leaving the market, they take with them a large level of demand for these homes. When demand drops, so do prices.
Still waiting for first-time homebuyers to return to the market en masse
At this point, traditional homebuyers haven't returned to the market in sufficient numbers to make up the difference. Particularly, first-time homebuyers remain wary of buying.
Making it tougher for those first-time buyers, the FHA recently raised its fees for mortgages backed by the government agency. The FHA estimates that 40% of the loans it backs are for first-time homebuyers. That increased cost reduces affordability and therefore decreases the ability for some first-time homebuyers to make a purchase.
With Wall Street investors leaving the market, demand has fallen short. Source: Wikimedia Commons.
Should you be worried?
Based on the strength in the broader economy and the continued improvement in real estate market fundamentals, the typical American homeowner shouldn't be worried.
The price declines in the major indices today are being driven by a short-term decline in investor participation in the market. With continued economic improvement, traditional buyers will replace those investors and replenish that demand. The picture on the supply side remains stable, indicating that home prices will continue to steadily increase in the medium and long term.
