Homes sales surged in May as a large jump in existing sales offset a drop in new home sales. Inventory shortages were reported across most markets. Builders remain reluctant to build large, entry-level developments while existing owners are still hesitant to list their homes for sale. Median home values have reached previous peaks but differences in the pace at which equity has been restored in homes varies widely across markets. The premium paid for new homes relative to existing homes also remains historically high.
Gains in the existing market were broad-based with the exception of the Midwest, where sales jumped last month. The drop in the market for new homes was concentrated in the Northeast, where existing home sales also surged last month. The new market in the West suffered a setback; escalating land costs and a shortage of both skilled and unskilled construction workers is holding back activity. Construction costs and the hurdles to secure zoning are particularly high in California.
Realtors’ data suggest that first-time buyers declined as a share of the market in May. The volume of all-cash purchases remains high, as individuals investors are now entering the market and flipping.The data on actual mortgage applications, however, is much more encouraging when it comes to first-time buyer demand. Agency-insured mortgages for first-time buyers rose 15% from a year ago in May.
Young buyers who have student debt are delaying buying homes for longer than previous generations. The oldest Millennials, and Generation X, who were locked out of the market earlier in the cycle, are now returning. Mortgages requiring high FICO scores but lower down payments are easing their entry into the housing market..
Bottom Line: Housing continues to heal with more of the action showing up in prices rather than sales. Most home owners are still playing catch-up on what they lost to the financial crisis. There are a few markets, most notably in California, that look a bit frothy. The rebound in growth in the second quarter will be significant, but Federal Reserve officials are more worried about whether the momentum we see can be sustained.