As per usual, we'll start with the good news first. In December of 2017 (the latest month for which data is available), existing-home sales slowed in most of the country, but rose in total by 1.1% and was the best month of performance in 11 years.
Furthermore, pending home sales rose another 0.5% in December, continuing a three-month trend and moving the Pending Home Sales Index to its highest level since last March. Dr. Lawrence Yun of NAR has continued to stress that increases in employment and wages, as well as the possibility of higher interest rates, are driving buyers into the market. This is not independent of the lack of affordable housing, however. Current market conditions could ultimately move buyers into homes that are more expensive than they could afford in the next recession.
Recognizing this gap in the market between supply and demand, new-home construction starts are projected to expand by an aggressive 13.3% this year, which brings us to our cautionary bit of the email.
In December of last year, the index for U.S. Homebuilder Sentiment approached its highest level since 1999, and the future sales index rose to 79, 3 points above its most recent peak in 2005 at 76. In less bullish markets, the median home price in the U.S. normally tracks long-term inflation as measured by the Consumer Price Index. "Last summer, [median home prices] were as high as 32% above this measure; in 2006, just before the housing bust, values were about 35 percent higher, according to data from the National Association of Realtors. Half of the 50 largest metropolitan areas were overvalued relative to incomes in November of 2017, compared with 36 percent two years earlier, according to an analysis by data provider CoreLogic."
Today, the Federal Reserve will swear-in their new Chairman, Jerome Powell. As an organization that painstakingly works to be transparent about its decision-making process, the Fed has made clear they intend to raise interest rates three times this year. Homeowners and REALTORS should take note; an increase from 4% to 5% on a 30-year mortgage can mean a 12% increase in monthly mortgage costs for would-be homeowners-- something most new buyers might find prohibitive.
Great news at the beginning of 2018 from the end of 2017-- existing home sales jumped 5.6% in November 2017 to its highest level in 11 years. The U.S. housing market recovered from its hurricane-based slowdown and pent up demand for purchases caused a surge in existing home sales; it's unlikely to see more significant increases like this until new housing can meet current demand. Additionally, the Case-Shiller U.S. National Housing Prices Index continued to climb past its 2007 peak before the Great Recession. (Image below displays data from Jan. 2006 to present)
Some economists are concerned by the latent demand for housing by financially-strained millennials. "Higher student debts and the difficulty of getting on the housing ladder have made it harder for millennials to build a nest-egg. That disparity might come back to bite the baby-boomer generation, who are fast moving into retirement. When baby-boomers want to cash in their assets, they may find millennials can’t afford to buy them at current prices," full article here. Whether or not millennials will be able to purchase those assets could be the crux of another macroeconomic issue in the housing market.
The U.S. Senate convenes today and the House of Representatives will start again next Monday. At the top of the agenda: passing a budget deal by January 19th to avoid a government shutdown, renewing funding for the Children's Health Insurance Program, and reauthorizing the Foreign Intelligence Surveillance Act.
Be on the look out for our Calls-For-Action as congress and the state legislature reconvene!
In October, the latest month for which data is available, existing-home sales rose by 2.0% to their fastest pace since earlier this summer. A continued short supply of homes led to lower sales year-on-year for last October, however. Additionally, pending home sales rose a robust 3.5% in October, following three months of diminishing activity. Pending sales also fell behind in a year-on-year comparison, however.
The market conditions caused by having a limited supply of homes for sale are prevalent in all relevant economic and behavioral metrics, particularly in October's foot traffic, which rose by 28.8 points last month and is up over 33.9 points year-on-year. Dr. Lawrence Yun, the National Association of REALTORS®' resident economist, views foot traffic as an indicator of future sales between two and three months into the future.
While the labor market has become rather tight over the last couple of years and wage growth has increased accordingly, the market for home-sales is likely to remain taught (with continued price increases) for some time into the future. As the Federal Reserve acts to increase interest rates, the costs of borrowing for home-buyers will increase as well, outpacing any rise in wages causing downward pressure on housing prices. This, according to market data and forecast for the next three quarters, is likely to be met with increased new-home construction. Notably, labor productivity in construction has remained constant since about 1960, dramatically lagging behind other economic sectors of labor. As these trends continue, the market seems amenable to a long-term spate of new-home construction, exactly what our economic data seems to indicate for 2018Q2.
As the North Carolina Homeowners Alliance closes out the 2017 year, we are keeping our eyes on National Tax Reform and the National Flood Insurance Program-- should these developments materialize, we will reach out to you with a call for action!