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Why slowing home sales may help the housing market

Category | Economic Trends
The real estate market is primed to keep growing.

The past year has been good for home sales overall, and the rapid increase in homebuying activity has pushed prices to to new heights. The increase in demand is welcome, but the additional price pressure is not as positive. 

First-time homebuyers are a critical part of a healthy housing market, but many are having difficulty buying a home thanks to prohibitively high prices. A recent slowdown in existing home sales might frighten some industry watchers, but it likely represents an opportunity for the housing market to catch up to demand. Home construction is on the rise, and the number of new families looking for homes is set to increase substantially over the next several years. A slower pace of housing market growth may allow the entire industry to progress at a more sustainable level. 

A dip in sales
Existing home sales stalled in August, according to the National Association of Realtors. The 4.8 percent drop in sales came after 11 consecutive months of gains. Sales generally take a hit at the end of summer, and this August slide is in line with historical trends. 

"The August drop is in line with historical trends."

The dip highlights the constant upswing in home prices that has gripped the market since last year. The NAR reported home prices are up 4.7 percent over August of last year, and this is in keeping with rapid price appreciation over the last several years. 

August's decline may actually be beneficial for the housing market overall, because it may give builders time to increase construction ahead of a large uptick in demand. 

A combination of factors
Several elements will converge to push homebuying demand to new levels during the next several years. The drop in homebuying that occurred after the financial crisis was rooted in a lack of young homebuyers and the weak financial standing of many Americans. Both factors are set to change in the near future. 

Homebuying is highly correlated with the foundation of new households, because people who are married or who intend to have children are more likely to own a home. According to a new forecast from the Mortgage Bankers Association, the number of households in the country is set to explode during the coming decade. They anticipate that between 13.9 and 15.9 million households will be created, which will probably result in a significant increase in homebuying activity. 

The increase in employment throughout the U.S. is also poised to push up buying activity, but homebuilders will need to step up their activity first. According to the NAR, homebuilding has fallen behind job generation in the U.S., further contributing to the inventory imbalance that's pushed up prices. 

Slow and steady wins the race
All of these issues come together to make a slower rate of housing market growth important. Housing demand exists, and is likely to grow, but people will need affordable homes. This slight decline in sales represents an opportunity for the industry to catch its breath and prepare for several more years of impressive growth. 

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