US existing home sales hit 8-year high, but first-time buyers squeezed out

Existing home sales rose a strong 2 percent to a 5.59 million annualized pace in July, marking the third straight month of sales increases. But the share of first-time buyers fell as rising costs and a lack of affordable homes for sale pushed many out of the market. 

The Federal Reserve is on track to raise interest rates in the near future, and the effect on potential homebuyers is a big question mark. Will the specter of higher rates spur a frenzy of activity while rates are still low or scare still-timid first-timers away? Since buying a house is contingent on a slew of other factors beyond interest rates, will there be any effect at all?

Even with the rate hike on the horizon, the real estate market has been on a steady upswing through the summer. Sales of existing homes rose 2 percent to an annualized pace of 5.59 million in July, according to data released Thursday by the National Association of Realtors (NAR). Single-family home sales led the charge, increasing by 2.7 percent. 

It was the third straight month of increases for existing home sales, which remained at their highest annualized rate since 2007. Additionally, last month marked a 10.3 percent increase in sales from July 2015, making it the 10^th consecutive month of year-over-year increases.

Home prices also went up, continuing an unbroken three-and-a-half year streak of increases. The median price for an existing family home was $234,000 in July – a 5.6 percent increase from the year before.

Despite the strong numbers, certain factors are working against the market’s future health, particularly at the more affordable end. For one, pending home sales fell in June, suggesting that sales could hit a rough patch in the coming months. Second, the share of first-time buyers fell for the second straight month – tighter inventory at lower price points, combined with outside financial pressures, left many potential first time homeowners with a lack of options, according to NAR chief economist Laurence Yun.

"The fact that first-time buyers represented a lower share of the market compared to a year ago even though sales are considerably higher is indicative of the challenges many young adults continue to face," he says in the NAR release. "Rising rents and flat wage growth make it difficult for many to save for a down payment, and the dearth of supply in affordable price ranges is limiting their options."

Inventory is indeed shrinking. The months' supply of unsold homes decreased to 4.8 in July (at the current rate of sales, it would take 4.8 months to run out of inventory), and the average home sat on the market for just 42 days, a drop from 49 days in July of last year.

Things could get even tighter in the coming months. For those who can actually find an affordable home, it’s a really good time to buy – thanks to the Federal Reserve, interest rates are at historic lows, meaning the possibility of locking in great rates on mortgages. With the job market relatively stable, that may encourage buyers to get in before rates inevitably rise in the near future. The Fed is widely expected to raise rates before 2015 is out, and many analysts expect the first hike (which will be a small one) could come as early as September. "The creation of jobs added at a steady clip and the prospect of higher mortgage rates and home prices down the road is encouraging more households to buy now," Yun says.

But on the flip side, sustained price growth combined with a glut of interested buyers could spur more owners who had been waiting to list their homes in the coming months, says Mark Fleming, chief economist at First American, a title insurance provider. “Interest rate levels remain favorable,” he writes via e-mail. “Pent-up supply is being released and existing owners are feeling more confident to place their homes on the market, helping to drive the actual sales level higher and close the gap between market capacity and actual existing-home sales quickly."