January 22, 2020

Existing home sales jumped 3.6% in December to 5,540 thousand after having fallen 1.7% in November.  Sales currently are 10.8% higher than where they were at this time last year.

Lawrence Yun, NAR chief economist said that “Home sellers are positioned well, but prospective buyers aren’t as fortunate. Low inventory remains a problem, with first-time buyers affected the most.”  He added that “Price appreciation has rapidly accelerated, and areas that are relatively unaffordable or declining in affordability are starting to experience slower job growth.  The hope is for price appreciation to slow in line with wage growth, which is about 3%.”

With a big jump in sales  and a big drop in the available inventory, the month’s supply of available homes fell from 3.7 to 3.0 months.  Realtors consider a 6.0 month supply as  the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in extremely short supply.  Given the low inventory of homes available for sale Yun continues his call for new construction. “The new home construction seems to be coming to the market, but we are still not seeing the amount of construction needed to solve the housing shortage.  It is time for builders to be innovative and creative, possibly incorporating more factory-made modules to make houses affordable rather than building homes all on-site.”

If one looks at the actual number of homes available for sale, it has been steadily declining for a decade.  Realtors cannot sell what is not available for sale.  If sales were not being constrained by the limited supply they would almost certainly be at or above a 6,500 thousand pace rather than the current 5,540 thousand.

Meanwhile, properties stayed on the market for just 41 days in December.  In December of last year home stayed on the market 46 days so the current level is 10.9% lower than where it was Forty-five percent of homes that sold in December were on the market less than a month.  The 41-day length of time between listing and sale is close to the shortest on record.  Back in 2011 homes remained on the market for 100 days.  Thus, the demand for housing still seems to be quite solid.

The National Association of Realtors series on affordability now stands at about 165.  While Yun is concerned that housing will become less affordable if prices rise at a faster rate than income, that simply is not happening.  At its current level  a household earning the median income has 65% more income than is necessary to get a mortgage for a median priced house.  Going into the recession consumers had only 14% more money than was required to purchase that median priced home.  Thus, housing remains quite affordable and should continue to remain affordable throughout  2020 because sizable job gains and rising wages are boosting income, mortgage rates have fallen, and that combination is more offsetting the increase in home prices.  As a result, housing affordability has risen considerably in the past few months.

Existing home prices rose 1.2% in December to $274,500 after having risen 0.1% in November.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $272,300.  Over the course of the past year existing home prices have risen 7.8% which is a bit higher the 4.0-5.0% range that we have seen for the past year or so.  The shortage of homes available for sale finally seems to be putting upward pressure on prices.

At the same time mortgage rates are declining.  they reached a peak of 4.9% but with global GDP growth slowing and economic uncertainty rising, mortgage rates have fallen steadily since the beginning of 2019. to 3.7%  At the same time, and for the same reasons, the Fed cut rates three times last year.

The housing sector will continue to climb in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income. Wage growth has begun to accelerate.  Home prices have been rising at a moderate pace.  And mortgage rates have worked their way lower to 3.7% and should rise only slightly in 2020.

 Stephen Slifer

NumberNomics

Charleston, SC