Price Pressures Build
Existing home sales rose to a 5.33 million-unit, annualized rate in March after being revised down from an already tepid pace in February. Prices accelerated with contracting inventories. The pickup in median prices for single-family homes was more pronounced than in the condo and co-op markets. Sales were concentrated in the middle portion of the market. A shortage of move-in ready, entry-level homes continues to limit sales in the low-end of the housing market where first-time buyers are concentrated.
Moreover, the lack of supply in entry-level properties is not likely to ease anytime soon. Builders continue to build fewer, more expensive homes in response to the squeeze on margins from higher land costs (and fees charged by cash-strapped communities), rising materials costs and a shortfall in less expensive immigrant labor. At the same time, owners in the least expensive markets remain the most reluctant to list their homes for sale. More of them are still underwater and/or have not maintained their properties well enough to clear even their closing costs in a sale.
The realtors reported that first-time buyers are still reluctant to buy. This contrasts with an analysis of the mortgage data by Ed Pinto at the American Enterprise Institute (AEI) that suggests first-time buyers are gaining traction. They are however, taking on higher loan-to-value-level mortgages in order to stretch and move into more expensive properties. This squares with survey data indicating that many first-time buyers are renting for longer than earlier cohorts did and then skipping entry-level homes to buy in the trade-up market.
The million-plus market showed some softness, which is more a reflection of the shift from Wall Street to Main Street than supply constraints. Volatile financial markets have taken a toll on bonuses and jobs in the high end of the financial services sector since the latter part of 2015 and into early 2016. We are also seeing fewer foreign buyers in the largest markets. The crackdown on corruption in China and low oil prices have put a damper on capital flight to the U.S. from abroad.
Regionally, gains were concentrated in the Midwest and Northeast. The gains in the Midwest reflect better inventory conditions. Sales in the South also moved higher, but not as rapidly, and remain critical to seeing a turn in housing starts; the South still accounts for more than half of all new residential construction. The West showed some weakness; inventories there are almost nonexistent while affordability has deteriorated rapidly in California.
Bottom Line: The mismatch between demand and supply in housing creates a conundrum for the Federal Reserve. Inventory constraints show up in higher prices, which should add new fuel to shelter costs in price measures. However, a lack of actual sales activity, combined with the dampening effects that a shortfall in sales and starts does to overall consumer spending, will ultimately limit employment gains and overall economic growth. Oh, to be a fly on the wall at the Federal Open Market Committee (FOMC)’s meeting in April. Look for a June rate hike to remain a possibility, but not a guarantee, in the FOMC statement next week.