Existing home sales fell to a 44 million-unit rate in July after being revised lower for June. The drop follows a plummet in new home sales, which are mostly too expensive for entry-level buyers whose demand for housing is increasing. The pace for July existing home sales was the lowest since August 2016.
The declines were uneven across regions of the country. Sales in the Northeast and Midwest fell, while sales in the West and South posted moderate gains. Extremely tight inventories, particularly in the entry-level market is the primary hurdle to additional sales. Inventories of homes available for sale fell one percent between June and July; they are off nine percent from one year ago. The supply of homes for sale dipped to just over four months, well below the six months’ supply considered “normal” for a housing market that is in balance. First-time buyers continued to account for a rising share of sales.
The median price for an existing single-family home fell to 260,600 in July from 265,500 in June. Prices on a year-over-year basis, however, rose 6.3%, much faster than incomes. The premium for a new versus existing home widened slightly to 20% in July from a little more than 17% in June. The premium for a new versus existing home hit a peak of 53% in February 2012. The shrinking premium for newly built homes is due to sharp increases in existing home prices. Builders are reluctant to move downstream because of increasing costs for land, materials and labor in some places, which make it difficult to profit from building less expensive homes. There have been improvements in the quality of prefabricated homes, which could fill some of the gap on affordable housing going forward, but the market is still small.
The average age of existing homes has risen since the crisis; many properties were left vacant and neglected. The entry-level demand, the dearth of turnkey existing homes for sale, combined with disincentives to build smaller, less expensive homes, have drawn down inventories and pushed up prices. Bidding wars for move-in-ready properties have become increasingly common. Homes are going under contract in less than one month, which is a sign of underlying strength in demand relative to supply. The problem is that homes in some markets remained underwater longer than in nearby suburbs, which means many were neglected for longer. Most first-time buyers don’t have the resources to do major repairs and renovations.
Realtors are once again steering entry-level buyers into riskier mortgages to keep the market going. In a report from the National Association of Realtors, one agent in California said that “Every month this year, roughly 60% of buyers who financed their homes with a mortgage made a downpayment of 6% or less.” That leave little wiggle room if prices fall.
Bottom Line: Supply of affordable homes remains the primary constraint in the housing market, especially now that first-time buyers have returned. During past recoveries, construction caught up (and overshot) demand. That seems unlikely in the near term, which means that housing will make a smaller contribution to the overall economy; it also means that more millennials will be locked out of climbing the wealth ladder of housing.