"Bargain prices brought out massive amounts of investment buying last year—which was not where demand usually comes from," said Joel Naroff, chief economist of Naroff Economic Advisors. "When you had double-digit increases in sales starts and prices, the idea that would continue is unrealistic."
Now, with prices leveling off and sales weakening again, there are rising concerns that the downturn could be more than a temporary winter slump.
On Wednesday, Fed Chair Janet Yellen warned a congressional panel that "the recent flattening in housing activity could prove more protracted than currently expected."
For the last eight years, the economic recovery has been held back by the weakest housing recovery since the Great Depression. After sales of existing homes peaked at an annual rate of 7.3 million in 2005, a historic, four-year slide cut them to roughly half that level. Sales perked up in 2009 thanks to tax breaks for first-time homebuyers, but tanked again to new lows after the program expired in 2010.
Since 2012, a gradual bottoming of prices has helped spur a wave of heavy buying by investors—everyone from mom-and-pop landlords to hedge funds snapping up houses in bulk. Cash buyers still make up more than 40 percent of home sales, according to RealtyTrac.
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But as price gains level off, the strength of that cash infusion is fading.
"The transition that we're going through now is this slowdown in the investment component to the more traditional buyer," said Naroff. "How long will it take? We've never been through this. So I don't think anyone can answer that question."
As Yellen's caution indicated, the outcome will have widespread implications for the overall economy. Part of the uncertainty is based on the heavy flow of investment cash that has masked ongoing weakness in underlying demand for housing, especially from first-time and noncash buyers.
Tight credit gets some of the blame for that weakness. Though mortgage rates remain relatively low by historical standards, lenders remain choosy about who they'll approve for a loan.
While lending standards have eased for commercial and other types of consumer loans, "we have not seen meaningful signs of easing in mortgage lending despite rising house prices and very low levels of mortgage defaults," said Goldman Sachs economist Hui Shan in a recent note.
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Those tighter lending standards have forced a sizeable portion of potential buyers to the sidelines, shrinking the market for homeowners with a property to sell.
"We've raised the bar for the bottom 25 percent of the market who otherwise would have been eligible buyers," said John Taylor, president of the National Community Reinvestment Coalition. "When you have folks on the bottom who can't get access to credit and can't buy—then the home you're trying to sell has less value because there's less demand for it. There's a ripple up effect."
Much of the softening of demand has come from younger entry-level buyers, who are struggling to move out on their own after surviving the Great Recession's weak job market. As of 2012, nearly 4 percent of U.S. households included an adult child aged 25 to 34, an increase of 1.2 million from 2006.
"Today's young adults have achieved homeownership at a lower rate than their parents at the same age, and we believe that they will continue to do so for some time," according to Chris Porter, chief demographer at John Burns Real Estate Consulting.
For those who do strike out on their own, the housing bust and foreclosure crisis has had a chilling effect on the generations-old American Dream of homeownership. A recent survey by the National Endowment for Financial Education found that homeownership was a top priority for just 13 percent of those aged 18-34. Half of the group put the goal of retirement savings at the top of their list.