If economic reports were songs, you might be
humming the monthly reports from memory. The
numbers have been changing from month to month,
but the tune has remained the same. June was no
exception. Once again, the reports tell us:
The economic recovery, already the longest
on record, continues.
Employers are hiring. The 223,000 workers
they hired in May beat predictions and
reduced the unemployment rate to 3.8 percent
– an 18-year low.
Most economic indicators, consumer
confidence and consumer spending among them,
are pointing upward.
The housing market continues to struggle as
rising mortgage rates, rising home prices,
and scarce inventories suck the energy out
of homebuyer demand.
A Worrisome Wrinkle
Focusing on housing, because it is a worrisome
wrinkle on an otherwise smooth economic
narrative: Existing home sales in April fell 2.5
percent compared with March – an unwelcome trend
during what is supposed to be the busiest
homebuying season. The April total also lagged
the year-ago pace for the second consecutive
month, while pending sales posted their fourth
consecutive year-over year decline, belying the
strong home buyer demand that real estate agents
report and that consumer surveys confirm.
Rising rates and prices are creating acute
affordability problems for first-time buyers -
purchases in this market segment declined by 2
percent in the first quarter compared with a
year ago. But the lack of inventory also appears
to be slamming the door on buyers for whom
affordability isn’t a defining issue.
That is the reason “home sales are stuck and not
breaking out,” according to Lawrence Yun, chief
economist for the National Association of
Realtors (NAR), who described the shortage of
listings as “dire.”
Resilient – But for How Long?
Although analysts note the “resiliency” of home
buyers, who have been shrugging off the impact
of higher home purchase costs to pursue home
ownership opportunities, there are signs that
the inventory shortage is nibbling away at
demand above the entry-level. Redfin’s Housing
Demand Index declined by 1.3 percent in April
compared with March, pushing this indicator
almost 12 percent below the year-ago level.
“April was the first time in 27 months that we
saw a year-over-year decline in the number of
homes," Nela Richardson, Redfin’s chief
economist, noted in a report. She attributed
the decline largely to the dearth of available
homes for sale.
“It's the stubbornly low inventory levels in
much of the country that are preventing sales
from really taking off like they should be,"
Freddie Mac Chief Economist Sam Khater agrees.
"The underlying demand for buying a home is
holding up, and will continue to do so, as long
as the economy is generating solid job and
income growth,” he argues in a recent report.
“Most markets simply need a lot more new and
existing supply to cool price growth and give
buyers enough choices."
Supply Side Help
There is some good news on the supply front:
Single-family home starts in April were more
than 7 percent above the year-ago pace and
permits for the first four months of the year
were 8.6 percent above the same January-April
period last year. New home sales, though a
little (1.5 percent) below the March level were
11.6 percent higher year-over year.
Jim O’Sullivan, chief U.S. economist for High
Frequency Economics, sees “no sign of ongoing
weakening” in the April data. “The pattern
suggests some loss of momentum, but probably in
the form of slower growth rather than
contraction,” he told
Zillow Senior Economist Aaron Terrazas agrees,
noting in the same article that the slight April
decline in new home sales “was actually smaller
than expected, and doesn’t represent much of a
deviation from the general strength we’ve seen”
since the beginning of this year.
Like many analysts, Terrazas thinks a strong
economy and demographic trends (as millennials
reach prime homebuying age) will continue to
offset the contrary forces created by higher
interest rates and home prices. But some
question just how effectively buyers can resist
those economic headwinds – and for how long.
Home prices are rising at annual rate of between
6.5 percent and 9 percent, depending on which
index you follow; incomes have not come close to
matching that pace. Since the housing market
hit its cyclical bottom six years ago, the NAR’s
Nun reports, home prices have increased by 48
percent while wages have grown by only 14
percent. “The current pace of price
appreciation far above incomes is not
sustainable in the long run,” he insists.