Americans Are Ready and Willing to Buy, But Seller Sentiment Remains Extremely Negative

December 22, 2011

Prospective homebuyers believe now is a good time to buy, given today’s low home prices and low mortgage interest rates, but potential sellers are nearly unanimous in reporting that it is not a good time to sell a home, citing difficulty in finding buyers at desired sales prices, according to a study released by the Mortgage Bankers Association (MBA).

The study entitled “The Great Recession and Attitudes Toward Homebuying,” conducted by Gary V. Engelhardt, professor at Syracuse University and sponsored by MBA's Research Institute for Housing America (RIHA), utilizes 30 years of data from the University of Michigan’s Survey of Consumer Attitudes to examine consumer attitudes toward homeownership before, during and after the most recent recession to see if consumer sentiment changed toward home buying and selling.

Key findings from the study include:

  • Despite high unemployment, slow economic growth and other problems plaguing the economy, almost 80 percent of American households believe that now is a good time to buy a home.
  • What is different about the current recession is that positive home-selling sentiment is at an historic low. Indeed, the sell-side of the market is dominated by deeply negative sentiment.
  • Negative home-selling sentiment is strongly related to difficulty in finding buyers at desired sales prices, as well as the large overhang of mortgages past due or on foreclosure.
  • Over the last two decades, the value of mortgage purchase originations has tracked home-selling sentiment more strongly than home-buying sentiment.
  • Over the next five quarters, positive home-buying sentiment is forecast to remain around current and long-run average levels. In contrast, positive home-selling sentiment is forecast to remain around current, historic-low levels. This suggests that selling sentiment and, hence, market activity, will remain sluggish in the near term.
“Despite high unemployment and slow economic growth, the bulk of American households believe that now is a good time to buy a home,” Engelhardt said. “Positive sentiment towards home-buying is strong particularly among young, educated, white and Hispanic households, and is attributable to low house prices and low mortgage interest rates. In fact, the pattern of home-buying sentiment during the current recession looks very similar to that of past recessions. Homebuyer sentiment falls as the unemployment rate increases, and improves as job growth returns and housing becomes more affordable.”

Distinguishing the current recession from other downturns is the dramatic decline in home-selling sentiment. From 1992 through 2005, positive home-selling sentiment fluctuated between 40 and 60 percent. Since 2005, sentiment has dropped precipitously, to around 7 percent currently, even while home-buying sentiment remains high.

“In economic terms, as market values have fallen, potential sellers have not adjusted their price expectations downward fast enough to bring buyer and seller sentiment in line with one another,” Engelhardt said. “There are a number of likely reasons for this.”

First, seller-expected prices may be tied to key past market values, such as the purchase price of the property, or what a comparable property may have sold for in the recent past. Second, underwater homeowners cannot adjust their minimum sales prices much below the outstanding mortgage balance, because they would need to bring cash to the table at sale. Third, with large declines in market values, sellers now hold a highly leveraged option that pays off with any future increase in prices.”

“I expect that over the near term, positive home-buying sentiment will remain at levels typical of the last 30 years. In contrast, positive home-selling sentiment is expected to remain at historic-low levels. This suggests that market activity will likely remain sluggish in the near term, consistent with MBA’s forecast,” Engelhardt said.

Michael Fratantoni, MBA’s vice president of research and economics added that the housing market has been stuck in a rut for the past three years.

“Following sharp declines in home values, the pace of housing construction remains near 50 year lows, and the volume of home sales remains more than 20 percent below that seen prior to the crisis,” he said. “This study shows that young households still value homeownership. The recession did lead homebuyers to pull back from the market, but homebuyer sentiment has returned to its long-run average.”

The difference this time was with current owners, who are not lowering asking prices This has resulted in low transaction volume.

“In some cases, buyer expectations of prices, developed based upon national trends, may not be aligned with their local market,” Fratantoni said. “Our forecast suggests that home sales will remain low in 2012, but should pick up in 2013 and beyond as home prices begin to recover.”

Click here to obtain a copy of the report.

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