The recent trend in home sales has shown a significant uptick based on price point, writes Bank of America Merrill Lynch economist Michelle Meyer.
As of February, sales of homes priced over $US1 million were up 14.4% year-over-year, while sales of homes under $US100,000 were down 18% on the year.
She points to a few key reasons for this divergence between lower and higher priced homes:
First, the share of distressed sales in overall sales was down to 16% in February, from 25% a year ago. These properties usually go at under $US100,000. “There are still 1.4 million properties in foreclosure inventory and another 1.2 million that are seriously delinquent, but the flow of these homes into the market is slow.”
Second, in terms of higher-priced existing homes, Meyers writes that “lenders have been eager to originate jumbo loans. Indeed, the spread between jumbo and conforming loans has narrowed to a historically low 9bp.” A conforming loan is one in which the size of the loan is equal to or under an amount set by Freddie Mac and Fannie Mae and is well under $US1 million (The limit for a one-unit property is currently $US417,000). Bottom line: credit is easing for jumbo borrowers.
Third, “higher-income borrowers have also become wealthier over the past year,” writes Meyer. Household financial assets climbed about 13% after a stellar run in the U.S. stock market last year. And since 60% of financial wealth is held by the top 10%, this has worked out well for higher-income households in the market for expensive properties.
And this trend can be seen through homebuilders. The size of new homes under construction are bigger, which means they’re more expensive properties. “Builders have been targeting move-up buyers in this cycle rather than first-time buyers,” she writes.