Maintaining the Upward Trend
As America pushes forward with slow but steady economic recovery, the housing market has been difficult to read. Is the housing market helping to drive the economy forward or acting as a drag on it? An argument can be made either way when looking at monthly data. Most housing numbers are so volatile that it is easy to cite trends prematurely, whether positive or negative.
With that in mind, let's consider last week's housing report from the National Association of Realtors. The number with the greatest fanfare was the 1.1% monthly increase in existing home sales for June (a 3.0% increase over the previous year). The seasonally adjusted annual rate rose to 5.57 million, representing the highest rate of sales in over nine years. Driven by supply concerns, the corresponding median sales price of a home climbed by 3.7% to $247,700.
Bloomberg's analysis notes that sales rates for the year have been "trending slightly higher," indicating steady and slow growth in the market, mirroring that of the greater economy. Also mirroring the greater economy, there are opposing forces in the housing market that balance out to provide steady growth that is sometimes obscured by monthly volatility.
Consider the numbers on monthly new home sales as an example. April's numbers were a massive surprise, surging by 16.6% to reach a seasonally adjusted annual rate of 619,000. May numbers fell to a respectable 560,000 while the April numbers were revised down to 586,000. Bad news? Not at all. The adjustments simply realign new housing sales numbers to the same slow upward trajectory that they have been on since 2011.
We have nearly recovered enough to reach the sales levels of late 2007, but at this rate, it will take another 7-8 years to reach the 1,074,000 new homes sold in June 2006.
The other housing data released last week fit nicely into the scenario of slow but steady growth. Monday's report on the Housing Market Index from the National Association of Home Builders dipped slightly in both the July reading (down from 57 to 56) and in future sales expectations (from 69 to 66). Even with a slight decline, these numbers reflect overall optimism (50 is the breakeven point) and future sales predictions still point to growth.
Tuesday's data reinforced mild optimism with both housing starts and housing permits beating the consensus estimates. Single-family home starts rose 4.4% and permits rose by 1.0%. Multi-family starts came in even stronger with starts up 5.4% and permits up by 2.5%. All of this data fits into a long-term slow upward trend.
Along with the existing home sales numbers on Thursday, the Federal Housing Finance Agency (FHFA) House Price Index from June shows a 0.2% increase over May and a 5.6% change over last June. Looking at a broader scale according to FHFA, the rate of increase in home prices has been slowing in recent months — good news if you are planning to buy a home, less so if you are hoping that your existing home will appreciate.
At the same time, the median sales price is at a record high. It should not take much of an increase in the rate of higher home prices to depress a growing but fragile market.
A House, A House, My Kingdom for a House
The flip side of a growing housing demand is a lack of supply. After holding for several months at a 4.7-month inventory, available existing homes dipped to a 4.6-month inventory — right on the average inventory level over the last 12 months. A chronically thin supply is staying well below the 6-month inventory considered the mark of a healthy housing market. Upticks in new home construction are helping, but the increase is being quickly absorbed by excess demand.
The Wall Street Journal reports that the real estate brokerage firm Redfin called June 2016 "the most competitive housing market since 2009," when the firm began tracking the housing market. It only took 41 days for the typical home for sale to go under contract.
Interest rates are still historically low, at 3.45% on average for the past week according to the St. Louis Fed. Low rates, combined with recent improvement in jobs and wage increases and muted increases in home prices, make it a relatively good time to buy a home — if you can find one that meets your needs in your preferred area.
Another bit of positive data comes from first-time homebuyers. First-timers play a critical role in "priming the pump" of the housing market. Those with existing homes who want to upgrade may be able to afford to buy their new home, but unless someone else can afford to buy their current home, the upgrade is unlikely to happen.
Tight credit, rising home prices, and a mismatch between available homes and potential buyers has kept the number of first-time homebuyers down, but in June, approximately one-third of homebuyers were first-time buyers. It has been almost four years since the proportion of first-time buyers was so high.
The main point: If you can find a home that you like and can afford, this is an excellent time to buy. Eventually, interest rates and/or home prices are likely to rise significantly.
The past week's housing data can best be described as mixed with positive overtones. Higher growth in existing home sales is particularly helpful, since existing homes usually account for around 90% of all home sales. Combine this with a corresponding increase in new home sales, and the housing market appears to be on the right track to catch up with pent-up demand.
As for the original question on housing, in some ways, housing can be considered both a driver and a drag for the economy. It's a driver with respect to demand, but a persistent lack of supply acts to throttle its growth. The longer-term prognosis depends on which force prevails.
On the supply side, it's important for new housing starts to accelerate. To open up the supply of valuable starter homes, it's also critical that those looking to upgrade to a larger home can afford to do so. On the demand side, interest rates must stay reasonably low and home prices must not skyrocket beyond reach of first-time buyers. Wages need to keep rising at a rate that closes the gap for first-time homeowners, and the job market must remain steady.
That's a lot to ask in any year, much less a Presidential election year. Still, in the long view the housing market has maintained positive momentum through multiple shocks. Perhaps it can handle the upcoming Presidential election as well, regardless of who wins.