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Why slower U.S. home sales signal a good recovery

July 23, 2013: 11:03 AM ET

Investor frenzy has lost steam.

120926033156-housing-gallery-2-house-for-sale-monsterFORTUNE РSales of previously owned homes may have slowed, but don't take it as a sign that the housing recovery has hit a bump. On Monday, the National Association of Realtors reported sales fell 1.2% in June from the previous month; it warned higher home prices and mortgage rates could hit buyers in the coming months.

Sales may indeed slow, but that probably will have less to do with higher costs than with the drop-off we've seen in purchases by big investors. Firms such as Blackstone Group have been buying properties at deep discounts, with plans to rent them out until the time is right to sell them for a profit. That has gone on for more than a year, but now current homeowners looking to buy are returning to the market; they' re driving sales again.

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It's a positive signal the housing industry is returning to normal, albeit very slowly:  In June, current homeowners were the only group that saw its share of home purchases rise to a three-month average of 44.6% from the previous month's 43.8%, according to the Campbell/Inside Mortgage Finance Housing Pulse Tracking Survey, which tracks home purchases by investors, current homeowners and first-time buyers. Meanwhile, investors' buying power in the housing market continued to slide; their share of home purchases fell to 19.7%, down from 23.1% in February and the lowest level since September 2012.

Sales in June may have slowed, but they are still 15.2% higher from a year ago and the second-best month of sales since November 2009. And while the average rate of a 30-year fixed mortgage has hit a two-year high at 4.68%, interest rates are still low and have shown to have little bearing on home sales.

More than that, the fact that investors are playing a lesser role in the market is an encouraging sign; the share of homes sold that were distressed – foreclosures or short sales – fell to 15% in June from 18% the previous month, according to the NAR, noting that's the lowest level since it began tracking the statistic in October 2008.

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To be sure, still missing in the housing recovery puzzle are first-time homebuyers, typically couples in their late 20s and early 30s. They accounted for 40% of home sales over the past 30 years, and in the wake of the housing market crash, they made up more than 50%, but that share has fallen sharply. In June, first-timers accounted for 29% of purchases of existing homes, compared with 32% a year ago, NAR notes.

This says a lot about where we're at in the housing recovery. It has been strong enough to deflate investor frenzy, but not quite enough to lure back those looking to seal the deal on their first home.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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