upside down house construction
A labourer takes a break as she works at an upside-down house under construction at Fengjing Ancient Town, Jinshan District, south of Shanghai, March 17, 2014. REUTERS/Carlos Barria


U.S. home prices have increased by more than 30% from the lows in early 2012, as strong demand from investors and cash buyers helped stabilize housing along with support from limited inventories and a gradually improving economy. This week’s data on existing home sales, however, show that investors and cash buyers are clearly playing a lesser role in today’s housing market. Investor purchases as a percentage of total purchases for May were 14%, down from 16% a year ago, while all-cash purchases constituted just 24% of sales, down from 32% a year ago.

While these measures could be construed as negative for housing, there was one clear bright spot: First-time homebuyers represented 32% of sales, up from 27% last year. The last time we saw a bounce from this cohort was tax-driven, resulting from incentives in the Housing and Economic Recovery Act of 2008. So while first-time homebuyer activity remains well below the long-term average of close to 40%, it has the potential to be a game changer for housing over the coming years.

While the overall number of 5.3 million seasonally existing homes sales was impressive, growing participation from first-time buyers is far more important for the health of housing. After years of weak purchase activity from young adults, it seems as though a strengthening economy, lower unemployment and gradual wage growth have put the “millennial” generation on increasingly firm financial footing (see our previous blog post on millennials here). Not to mention, the longer millennials live with their parents, the more likely they are to be able to save for a down payment on a house (assuming their parents aren’t gouging them on rent!).

As momentum in home price appreciation has slowed from a 14.5% year-over-year rate to the current pace of approximately 5%, growing demand from first-time buyers at a time when single-family construction has remained subdued has the potential to tilt the supply/demand scale back in a direction to support higher appreciation. In addition, the resurgence of these buyers has important ramifications for the broader economy in terms of consumer spending and jobs as existing homeowners “trade up,” buying furniture and making renovations.

Last, but certainly not least, PIMCO expects lending standards in residential credit to gradually ease over the coming years. This marriage of growing demand for housing, along with a potential increase in credit availability, should bode well for housing-related assets.

As reported by Business Insider