REALTORS® CONFIDENCE INDEX

Report and Market Outlook March 2014 Edition

NATIONAL ASSOCIATION OF REALTORS® Research Department Lawrence Yun, Senior Vice President and Chief Economist
Based on Data Gathered April 1 – 7, 2014

Table of Contents
SUMMARY .................................................................................................................................................. 1 I. Market Conditions .................................................................................................................................... 2 REALTORS® Confidence Buoyed Up in March By Seasonal Uptick .................................................. 2 Buyer Demand Continued to Outpace Supply in March ......................................................................... 3 Median Days on the Market At 55 Days in March .................................................................................. 4 Home Prices Rising Moderately .............................................................................................................. 4 REALTORS® Expect Prices to Increase Modestly in the Next 12 Months ............................................ 6 II. Buyer and Seller Characteristics .............................................................................................................. 7 Cash Sales: 33 Percent of Sales ............................................................................................................... 7 Down Payment: 60 Percent of First-time Buyers Put Down 6 % or Less .............................................. 8 Sales to First Time Buyers: 30 Percent of Sales ...................................................................................... 8 Investors, Second-home Buyers, and Relocation Buyers ......................................................................... 9 International Transactions: About 2.6 Percent of Residential Market .................................................... 10 Distressed Sales: 14 Percent of Sales...................................................................................................... 11 Rising Rents for Residential Properties .................................................................................................. 12 III. Current Issues........................................................................................................................................ 14 Comments Supplied by REALTORS® Responding to the March 2014 Survey .................................... 14 Tight Credit Conditions and Slow Lending Process ............................................................................... 15 Appraisals: Still a Concern But Process Is Better Compared to a Year Ago .......................................... 16 Reasons For Not Closing A Sale ............................................................................................................ 17 IV. Commentaries by NAR Research ......................................................................................................... 18 Job Additions, State by State .................................................................................................................. 18 Latest Mortgage Applications Data ........................................................................................................ 20 Highlights: 2014 Investment and Vacation Homes Survey ................................................................... 21

SUMMARY
Jed Smith and Gay Cororaton The REALTORS® Confidence Index (RCI) Report provides monthly information about market conditions and expectations, buyer/seller traffic, price trends, buyer profiles, and issues affecting real estate based on data collected in a monthly survey of REALTORS®. The current report is based on the responses of 3,833 REALTORS® about their transactions in March 20141. The survey was conducted during April 1 -7, 2014. Questions about the characteristics of the buyer and the sale are based on the REALTORS’® last transaction for the month. All real estate is local: conditions in specific markets may vary from the overall national trends presented in this report. The March data indicate a more upbeat confidence concerning market conditions compared to February. The improvement may reflect the seasonal uptick in demand with the onset of spring2. Confidence about the next six months also showed a slight improvement in March compared to February. The major problems reported by REALTORS® were low inventories of available homes and difficulty in obtaining mortgage financing. An exceptionally large number of respondents across several states reported very low inventory levels relative to demand. Another major problem is credit access. REALTORS® reported that even good credit clients were having trouble qualifying for mortgages. There were also reports that the Qualifying Mortgage (QM) regulations and the increase in FHA mortgage insurance premiums have had an adverse effect on buyers. Appraisal valuation is still an issue although the survey data indicates fewer transactions facing appraisal problems compared to previous months. The cost of obtaining flood insurance and the sluggish job growth continued to be reported as negatively impacting the market.

1

This is the total number of respondents for the entire survey. The number of responses to a specific question can be less because the question is not applicable to the respondent or because of non-response. The survey was sent to a random sample of about 50,000 REALTORS®. 2 The responses and data are not adjusted for seasonality effects.

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I. Market Conditions
REALTORS® Confidence Buoyed Up in March By Seasonal Uptick Confidence about current market conditions improved in March 2014 compared to February 2014, reflecting in part the seasonal uptick in spring. The REALTORS® Confidence Index - Current Conditions for single family sales rose to 71 (60 in February) . The indexes for townhouses/duplexes also rose to 49, while the index for condominiums improved to 42 although still below 50 which indicates “moderate” conditions . 3 Confidence about the outlook for the next six months slightly improved compared to February but is still lower compared to the same period a year ago. REALTORS® remained concerned about the low levels of inventory, difficult credit conditions, and uncertainty about flood insurance regulation. The six-month Outlook Index for single family homes was at 69 (68 in February), the index for townhouses at 51 (50 in January) , and the index for condominiums at 47 (46 in February). REALTORS® Confidence Index - Current Conditions
80 70 60 50 40 30 20 10 0 SF Townhouse Condo 71 49 42

3

An index of 50 delineates “moderate” conditions and indicates a balance of respondents having “weak”(index=0) and “strong” (index=100) expectations. The index is calculated as a weighted average using the share of respondents for each index as weights. The index is not adjusted for seasonality effects.

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200801 200804 200807 200810 200901 200904 200907 200910 201001 201004 201007 201010 201101 201104 201107 201110 201201 201204 201207 201210 201301 201304 201307 201310 201401

REALTORS® Confidence Index - Six Month Outlook
80 70 60 50 40 30 20 10 0 SF Townhouse Condo 69 51 47

Buyer Demand Continued to Outpace Supply in March

With the onset of spring , the Buyer Traffic Index notched up to 63 (59 in February) although demand was softer compared to a year ago as buyers faced higher prices and the continued difficulty in getting a mortgage. Still, demand continued to exceed supply with the Seller Traffic Index at 42 (43 in January). In many states, REALTORS® expressed frustration about the low inventory levels. An index of 50 indicates “moderate” traffic conditions4. REALTORS® Indexes of Buyer and Seller Traffic
80 70 60 50 40 30 20 200801 200804 200807 200810 200901 200904 200907 200910 201001 201004 201007 201010 201101 201104 201107 201110 201201 201204 201207 201210 201301 201304 201307 201310 201401 Buyer Traffic Index Seller Traffic Index 42 63

The index is constructed from a survey of REALTORS® reporting on whether they perceive traffic as “weak”, “moderate”, or “strong.”
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4

200801 200804 200807 200810 200901 200904 200907 200910 201001 201004 201007 201010 201101 201104 201107 201110 201201 201204 201207 201210 201301 201304 201307 201310 201401

Median Days on the Market At 55 Days in March With little inventory relative to demand, properties sold faster for the fourth straight month at 55 days (62 days in February)5. Short sales were on the market for the longest, at 112 days (98 February), and foreclosed properties were on market at 55 days (60 days in February). Non-distressed properties were on the market at 53 days (61 days in February). Conditions varied across areas. Approximately 37 percent of respondents reported that properties were on the market for less than a month when sold (34 percent in February) . Median Days on Market by Type of Sale
180 160 140 120 100 80 60 40 20 0

Mar 2014: All: 55; Foreclosed: 55; Shortsale: 112 ; Not distressed: 53

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All Source: NAR, RCI Survey

Foreclosed

Short Sales

Not distressed

Home Prices Rising Moderately REALTORS® continued to report that prices are generally still on an uptrend. About 68 percent of respondents reported that the price of their “average home transaction” is higher today compared to a year ago (65 percent in February). About 23 percent reported constant prices, and 9 percent reported lower prices.

5

A median of say 60 days means that half of the properties were on the market for less than 60 days and another half of properties were on the market for more than 60 days.

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201403

Percentage of Respondents Reporting Price Change from a Year Ago
Higher 80% 70% 60% 50% 40% 30% 20% 10% 0% Lower Unchanged 68%

23%

9% 201203 201204 201205 201206 201207 201208 201209 201210 201211 201212 201301 201302 201303 201304 201305 201306 201307 201308 201309 201310 201311 201312 201401 201402 201403

Approximately 14 percent of reported sales were of properties that sold at a net premium compared to the original listing price (same as in February). In mid-2013, about 20 percent of REALTOR® respondents reported selling properties at a premium. Percent of Resported Sales Where Property Sold at a Net Premium Compared to the Original Listing Price
25% 20% 15% 10% 5% 0% 14%

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REALTORS® Expect Prices to Increase Modestly in the Next 12 Months REALTORS® generally expect prices to increase over the next 12 months with a median expected price increase of 4.2 percent6. Low inventory compared to demand is expected to continue to buttress prices , as well as the declining share of distressed sales in the market. Relatively strong economic growth in some states is also a factor propping up housing demand and prices. The states with the most upbeat expected price increases of 5 to 7 percent are California, Oregon, Nevada, Georgia, Florida, and Hawaii (red). In states with booming economies like Washington, North Dakota, Texas, Michigan, the DC-Metro Area , and NY the expected price increase is about 3 to 5 percent range (orange). In the rest of the states, the expected price growth is less than 3 percent (blue).
State Median Price Expectation for Next 12 Months (in%) Based on REALTORS Confidence Index Survey, Jan 2014 – Mar 2014 Surveys

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The median expected price change is the value such that 50 percent of respondents expect prices to change above this value and 50 percent of respondents expect prices to change below this value. A median expected price change is computed for each state based on the respondents for that state. The graph shows the range of these state median expected price change.

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II. Buyer and Seller Characteristics
Cash Sales: 33 Percent of Sales Approximately 33 percent of respondents reported cash sales (35 percent in February). 7 Move-up buyers, investors, buyers of second homes, and foreign clients are more likely to pay cash. About 14 percent of reported sales to first-time buyers were cash sales compared to about 60 to 75 percent for international buyers and buyers of property for investment or second home purposes. Cash Sales as Percent of Market
40% 35% 30% 25% 20% 15% 10% 5% 0% 200810 200901 200904 200907 200910 201001 201004 201007 201010 201101 201104 201107 201110 201201 201204 201207 201210 201301 201304 201307 201310 201401 33%

Percent of Sales That are All-Cash, by Type of Buyer-- Mar 2014
80% 70% 60% 50% 40% 30% 20% 10% 0% FTHBuyer Investor Second home Relocation International Distressed Sale 14% 21% 71% 64% 51% 72%

7

The RCI Survey asks about the most recent sale for the month.

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Down Payment: 60 Percent of First-time Buyers Put Down 6 % or Less Fewer first time home buyers are putting low downpayments. About 60 percent of first time home buyers put down 6 percent or less compared to about 74 percent in 2009. Under tight underwriting standards, REALTORS® have reported that buyers who pay cash or put down large downpayments generally win against those offering lower downpayments. REALTORS® also reported that in some cases financing is approved for a lower amount. For buyers with sufficient financial resources, a higher downpayment also means saving on mortgage insurance premium payments. Percent of Reported First-Time Buyers Who Had Down Payment of 6 Percent or Less*
80% 75% 70% 65% 60% 55% 50% 200906 200909 201002 201005 201008 201011 201102 201105 201108 201111 201202 201205 201208 201211 201302 201305 201308 201311 201402 60%

*Based on NAR_RCI Survey of Realtors who reported a sale to a first-time buyer. The survey asks about the last sale for the onth. The shares are based on a rolling 3-mos data to smooth the series .

Sales to First Time Buyers: 30 Percent of Sales Approximately 30 percent of respondents reported a sale to a first time home buyer8 (28 percent in February). The tighter underwriting standards are especially challenging for first-time buyers who generally need mortgage financing with low downpayment terms, who may be paying off student debt, and who have credit scores that are not top-notch . REALTORS® have also reported that the increase in FHA mortgage insurance costs is discouraging buyers or making loans unaffordable9.

8

First time buyers account for about 40 percent of all homebuyers based on data from NAR’s Profile of Home Buyers and Sellers. NAR’s survey of buyers and sellers captures only buyers buying for residential purposes. 9 Borrowers can shift to conventional financing, but are in general likely to come up against more stringent underwriting standards.

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First Time Buyers as Percent of Market
60% 50% 40% 30% 30% 20% 10% 0% 200810 200901 200904 200907 200910 201001 201004 201007 201010 201101 201104 201107 201110 201201 201204 201207 201210 201301 201304 201307 201310 201401

Investors, Second-home Buyers, and Relocation Buyers

About 17 percent of respondents reported a sale to an investor, 11 percent reported a sale to a second-home buyer, and 13 percent reported a sale to a relocation buyer. The share of sales to investors has remained fairly stable, an indicator of continued investor interest for rental housing. Regarding the demand for properties for relocation purposes, there has been feedback from REALTORS® that many baby boomers would like to downsize, but there are not enough buyers for larger homes. Due to the tight inventory, sellers who want to move up or down are having trouble finding a suitable property. Sales to Investors as Percent of Market
30% 25% 20% 15% 10% 5% 0% 200810 200901 200904 200907 200910 201001 201004 201007 201010 201101 201104 201107 201110 201201 201204 201207 201210 201301 201304 201307 201310 201401 17%

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Second-Home Buyers as Percent of Market
16% 14% 12% 10% 8% 6% 4% 2% 0% 11%

18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 13%

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International Transactions: About 2.6 Percent of Residential Market Approximately 2.6 percent of REALTOR® respondents reporting on their last sale was of a purchase by a foreigner not residing in the U.S. International buyers typically pay cash. In NAR’s 2013 Profile of International Homebuying Activity, the major buyers were reported as being from Canada, China, Mexico, India, and the United Kingdom.

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201009 201011 201101 201103 201105 201107 201109 201111 201201 201203 201205 201207 201209 201211 201301 201303 201305 201307 201309 201311 201401 201403

Relocation Buyers as Percent of Market

Sales to International Clients as Percent of Market
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 201003 201005 201007 201009 201011 201101 201103 201105 201107 201109 201111 201201 201203 201205 201207 201209 201211 201301 201303 201305 201307 201309 201311 201401 201403 2.6%

Distressed Sales: 14 Percent of Sales

With rising home values, the market is seeing fewer distressed sales. In March, about 10 percent of reported sales were foreclosed properties, and about 4 percent were short sales.
Distressed Sales, As Percent of Sales Reported by REALTORS®
60% 50% 40% 30% 20% 10% 0% 200810 200901 200904 200907 200910 201001 201004 201007 201010 201101 201104 201107 201110 201201 201204 201207 201210 201301 201304 201307 201310 201401 Foreclosed Short Sale

Mar 2014: Foreclosed: 10% Shortsale: 4%

Foreclosed property sold at a 16 percent average discount to market , while short sales sold at a 11 percent average discount.10 The discount varied by house condition. For the past 12 months, properties in “above average” condition have been discounted by an average of 10-

10

The estimation of the level of discount is based on an estimate of what the property would have sold for if it had not been distressed (possibly in better condition, absent any taint of being distressed).

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12 percent, while properties in “below average” condition were discounted at an average of 1519 percent.
% %
30 25 20 15 10 5 12 % 18 %

Mean Percentage Price Discount of Distressed Sales Reported by REALTORS® (in %)

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Mean Percent Price Discount by Property Condition of Reported Distressed Sales (in percent) Unweighted Average for Apr 2013 to Mar 2014
20 15 10 5 0 Above average Average Below average 12 10 12 10 19 15

Foreclosed
Rising Rents for Residential Properties

Short sale

Demand for rentals remained strong. Among those REALTORS® involved in a rental, 48 percent (46 percent in February) reported higher residential rents compared to 12 months ago. About 20 percent of REALTORS® reported conducting an apartment rental, and about 4 percent reported a commercial rental transaction. While rising rents make home ownership more attractive, it slows the ability of current renters to save for a home purchase.

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10% 0% 15% 20% 25% 30% 35% 10% 20% 30% 40% 50% 60% 70% 0% 5% 201012 201102 201104 201104 201102 201012

4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

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Percent of Respondents Reporting Rising Rent Levels Compared to 12 Months Ago

Percent of Respondents Conducting A Commercial Rental

Percent of Respondents Conducting An Apartment Rental

48%

201207 201208 201209 201210 201211 201212 201301 201302 201303 201304 201305 201306 201307 201308 201309 201310 201311 201312 201401 201402 201403 4%

III. Current Issues
Comments Supplied by REALTORS® Responding to the March 2014 Survey
Jed Smith, Managing Director, Quantitative Research Every month REALTORS® provide a variety of comments on the state of the market when responding to the RCI survey. In general, REALTORS® noted that uncertainity about economic conditions, rising prices, weather, the limited inventories of available homes, and flood insurance were negatively impacting the home sales markets. Comments received this month provided mixed messages—low available inventories in many areas, more buyers than sellers, and a market that is still producing sales but that also seems to have lost momentum, and an active market in many areas (in some cases multiple bids) and a slowing market in other areas. Buyers were reported as increasingly cautious. As stated repeatedly, all real estate is local, so the summary of the comments has many exceptions to it, based on regional differences and the underlying economies. Weather, higher prices, and credit availability/interest rates were mentioned as problems. In some areas, REALTORS® noted low consumer confidence coupled with problems in the local economies. The overall message from REALTORS® was that the housing markets are cautious, and demand is slower but still substantial. The market has slowed. In particular, buyers are reported as resistant to higher prices, are more demanding, extremely cautious, and looking for properties in perfect condition. In many cases buyers are approaching sellers markets as if they were buyers markets, offering unrealistic and unobtainable prices. Limited inventories are reported as a major problem. An exceptionally large number of respondents noted that inventories of available homes were very low. This was reported to be a major problem. REALTORS® reported credit availability as very tight with unrealistic underwriting standards. REALTORS® reported that cash is king: a cash offer or major down payment has a major impact on contract acceptance. REALTORS® reported that good clients were having trouble qualifying for mortgages. This was repeatedly mentioned. Many good credit clients were reported as being unable to buy a home due to unrealistically high credit standards. Appraisals continue to slow/kill contracts. Appraisals have again shown up as a major issue. In particular, there was concern that current appraisals do not reflect changing and improving market conditions. Appraised values were reported as coming in too low. In addition, there was major concern in some cases about the lack of knowledge of local conditions by the appraisers. A major function provided by REALTORS® was reported to be buyer/seller education. The survey highlighted the value of REALTORS® in changing markets. In particular, both buyers and sellers have extensive access to on-line websites, news stories, and media reports; however, local markets are very site specific and the data and conclusions from public sources
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are reported to be frequently out of data and inaccurate. REALTORS® mentioned the needs in many situations to address buyer and seller expectations, unrealistic due to selective and inaccurate news reports. A number of regulatory problems were reported as impacting the real estate markets.  FHA and VA condo financing—seen as a problem in a number of cases.  Flood insurance—Mentioned by a number of respondents even though premium issues have been to some degree ameliorated. The reclassifications of flood plains has been a problem and in some cases is seen as inaccurate/inappropriate.  Dodd Frank debt ratios—reported as unrealistic for a number of clients, preventing sales from going through for credit-worthy clients. Tight Credit Conditions and Slow Lending Process REALTORS® continued to express concern over unreasonably tight credit conditions. Mortgage lenders were reported as continuing to display an unnecessarily high level of risk aversion. In the 2001-04 time frame approximately, 40 percent of residential loans acquired by the Government Enterprises (Fannie Mae and Freddie Mac) went to applicants with credit scores above 740. Slightly more than half of survey respondents who provided credit score information reported FICO credit scores of 740 and above. Distribution of Reported FICO Scores-- RCI Surveys
60% 50% 40% 30% 20% 10% 0% lt 620 620 - 659 RCI-Mar '13 660-699 RCI_Dec'13 700-739 RCI_Mar '14 740+ 1% 11% 16% 23% 48%

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Appraisals: Still a Concern But Process Is Better Compared to a Year Ago Appraisals remain a major issue although the problem appears to have lessened compared to a year ago. Approximately 24 percent of respondents reported encountering appraisal problems in March 2014 compared to about 40 percent in 2010. Of those who had problems, 9 percent reported a price renegotiation, 6 percent had a contract delayed, 9 percent a contract cancelled.

Percent of Respondents Reporting Appraisal Problems
45% 40% 35% 30% 25% 20% 24%

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Percent of REALTORS® With Appraisal Issues/Problems in March 2014
No Problems 76%

Negotiated to Lower Price

9%

Contract Delayed

6%

Contract Cancelled 0%

9% 10% 20% 30% 40% 50% 60% 70% 80%

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201403

Reasons For Not Closing A Sale

Lack of access to credit was often cited as a deterrent to home buying. About 14 percent of REALTORS® who did not close a sale in February reported having clients who could not obtain financing. About 6 percent reported that the buyer gave up while 8 percent reported that the buyer continued to seek new/other financing. Lack of agreement on price accounted for 11 percent. Another 10 percent reported that the buyer lost the competition. Appraisal issues were reported as accounting for 4 percent of failures to close a sale.

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IV. Commentaries by NAR Research
Job Additions, State by State
Lawrence Yun, Chief Economist North Dakota has been dethroned, knocked from the top as the best job creating state in the latest state level jobs data. Nevada moved to the top with a 3.8 percent job addition rate over the past 12 months versus North Dakota’s 3.7 percent. Despite this change, North Dakota is still the king in terms of longer-term job growth. Colorado, Florida, and Oregon round out the top-five fastest job creating states. On the bottom, New Mexico and Kentucky encountered very modest net job losses. New Jersey, Virginia, and Alaska had minimal or no job creation. Large cities are doing relatively well. That means traffic jams are getting worse in these markets, simply a byproduct of more people driving to work. San Jose in particular is red hot, with a 4.4 percent job growth rate. That is why both rent and home prices are escalating as more people seek housing in areas where there is minimal new home construction. Detroit is reversing some of its recent gains in jobs. In the latest data, Detroit shed 4,200 jobs. But the western part of the state is doing well, with Grand Rapids job growth rising by 3.0 percent. Irrespective of short-term job market trends, over the long haul job creation will favor large major cities because job growth will be faster in professional services than in manufacturing or agriculture. Jobs like accounting, software development, legal services, management consultants, and medical services will principally be in cities. Moreover, people are drawn to large cities because of cultural amenities that only a large city can justify, such as concerts, museums, and zoos. Companies, knowing that talented workers are drawn to cities, will want to be based in large cities to have access to a large pool of potential job candidates. Traffic unfortunately will get hellish. That is why developers of condominiums near downtowns in traffic congested cities can anticipate turning a good profit.

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Latest Mortgage Applications Data
Ken Fears, Director, Regional Economics and Housing Finance Policy Seasonally adjusted applications to purchase homes rose 2.7% for the week ending April 4th, the 4th consecutive increase. The purchase index is 13.9% lower than the same time in 2013. Purchase applications appear to have bottomed relative to last year and are clawing their way back if only modestly. The average rate for a 30-year fixed rate mortgage as reported by the Mortgage Bankers Association was unchanged from the prior week at 4.56%. The average rate a year ago this week was 3.68%. A strong increase in applications for government financing, up 3.6% relative to last week, led the improvement, though applications for conventional financing rose for the 3rd consecutive week with an increase of 2.3%. The cost of FHA insurance remains high by recent standards, but it is the only option for most borrowers with low down payments and credit scores less than 700. The high cost of FHA mortgage insurance combined with the general rise in rates since last year is crimping affordability on this portion of the market…particularly first-time borrowers and some minority groups. This week’s reading suggests a very modest thaw in the weak year-over-year trend for purchase applications. The index improved for the 4th consecutive weak but remains anemic relative to last year’s strength which was driven by sub-3.5% rates. Strong price growth and higher rates since last spring impacted affordability. However, the strong trend last spring also muted the normal seasonal pattern, suggesting that part of the trend this spring is a restoration of the normal seasonal pattern. Sales and applications will continue to pick up as we move towards summer in the typical seasonal pattern, but may remain muted relative to last summer until credit overlays ease and mortgage insurance pricing improves.

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Highlights: 2014 Investment and Vacation Homes Survey
Jessica Lautz, Director, Member and Consumer Survey Research On April 2, NAR released its annual Investment and Vacation Home Buyers Survey, covering existing- and new-home transactions in 2013. Below are the highlights and select charts from the report. The press release can be found here.
     

Vacation home sales rose strongly in 2013, while investment purchases fell below the elevated levels seen in the previous two years. Vacation-home sales jumped 29.7 percent to an estimated 717,000 last year from 553,000 in 2012. Investment-home sales fell 8.5 percent to an estimated 1.10 million in 2013 from 1.21 million in 2012. Owner-occupied purchases rose 13.1 percent to 3.70 million last year from 3.27 million in 2012. The sales estimates are based on responses from households and exclude institutional investment activity. Vacation-home sales accounted for 13 percent of all transactions last year, their highest market share since 2006, while the portion of investment sales fell to 20 percent in 2013 from 24 percent in 2012. The median investment-home price was $130,000 in 2013, up 13.0 percent from $115,000 in 2012, while the median vacation-home price was $168,700, up 12.5 percent from $150,000 in 2012. All-cash purchases remained fairly common in the investment- and vacation-home market: 46 percent of investment buyers paid cash in 2013, as did 38 percent of vacation-home buyers.

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