June 21, 2024

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Existing home sales declined 0.7% in May to 4,110 thousand after having declined 1.9% in April.  In fact, this is the third consecutive decline as the combination of near 7.0% mortgage rates and an extreme shortage of homes available for sale is taking its toll.

Lawrence Yun, NAR chief economist said that, “Eventually, more inventory will help boost home sales and tame home price gains in the upcoming months.  Increased housing supply spells good news for consumers who want to see more properties before making purchasing decisions.”  He added that,,”Home prices reaching new highs are creating a wider divide between those owning properties and those who wish to be first-time buyers.  The mortgage payment for a typical home today is more than double that of homes purchased before 2020. Still, first-time buyers in the market understand the long-term benefits of owning.”

Mortgage rates have climbed from 3.1% at the end of 2021 to 6.9%.  With the pace of economic activity likely to slow somewhat in the second half of the year and inflation gradually subsiding, mortgage rates may decline to 6.6% by the end of the year.

The average home sat on the market for 24 days in May which is a very short period of time.  It used to be that homes would sit on the market for 3 months or so.  That is no longer the case.  Despite the extraordinarily slow pace of sales, it is hard to argue that the drop-off in sales reflects a sharp drop-off  in demand.

As has been the case for a long time, there are very few homes available for sale.   Inventory rose 0.2 month in May to 3.7 months which is well short of the 5.0 month supply that is required to balance the demand for and supply of homes.  When the housing market collapsed in the 2008-09 recession this number peaked at about 11.0 months as many homeowners had adjustable rate mortgages which re-priced upwards and were unable to afford the new, substantially higher monthly payments.  Foreclosures were common.  The situation today is completely unlike that troubled period.  The lack of inventory reflects an inability of builders to significantly ramp up the pace of production.  Having said that, the number of homes available has been steadily rising in recent months and has increased 18.5% in the past year.  Eventually it will get back to the desired 5.0 month supply which is the point at where demand is roughly in line with supply, but it is unlikely to reach that mark prior to yearend.

The shortage of homes available for sale is causing prices to rise.  Home prices rose 3.1% in May to $419,300 after having climbed 3.5% in April and 2.4% in March .  The year-over-year change is now an increase of  5.8% but, more importantly, the rate of increase has been far more rapid at 23.8% in the first five months of this year.  If that continues the shelter component is going to re-accelerate and boost inflation along with it.

Housing affordability has dropped from where it was at the end of 2021 as home prices have risen sharply and mortgage rates have climbed to 6.9%.   Housing affordability is currently at 95.9 which means that potential home buyers had 4,1% less income than required to purchase a median-priced home.  Many first time home buyers have been priced out of the market.  But if mortgage rates decline a bit later in the year, job gains boost consumer income,  and home prices are fairly steady, housing affordability should climb slightly and the median-income earning family should have 5% more income than required to  purchase a median-priced home by yearend.

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Given all of the above we expect existing home sales to rise about 13.0% in 2024.

We expect GDP to rise 2.8% in the second quarter of this year. followed by 1.5-2.0% growth in the second half of 2023.

Stephen Slifer

NumberNomics

Charleston, S.C.