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.