In 2017, I wrote:
“For 2018, I anticipate existing home sales to be in the range of 5.27 – 5.53 million units. If we end the year showing negative growth, with rising inventory once again, don’t worry, be happy. This would be “normal” especially when purchase applications are still trying to party like it is 1999.”
Today the NAR reported:
Total existing-home sales1, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, decreased 0.7 percent to a seasonally adjusted annual rate of 5.34 million in July from 5.38 million in June. With last month’s decline, sales are now 1.5 percent below a year ago and have fallen on an annual basis for five straight months.
If you follow me you probably know that am not a big fan of the thesis that low inventory is holding back demand for housing. Since 2015, I have warned that not to pay heed to the housing pundits that talk about record-breaking demand and low inventory. (Mortgage Purchase Application Data is only at 1998 levels folks) Instead we should be focusing on the housing tenure issue. I can’t wait for the next few existing home sales report to show that there would be record-breaking demand if inventory wasn’t so low. Year over year comps soon will show the best existing home sales prints of the cycle occurred when inventory levels hit cycle lows which had much lower inventory than the hot spring and summer demand & inventory months.
Keep in mind these two key points regarding the housing market in 2018:
Purchase applications have been up, year over year, in almost every report this year. You may recall in 2014, sales went negative because purchase application data fell 20% year over year. This year mortgage purchase application are growing between 1% -11% year over year. Comparatively, that might sound really good. But when you compare 2018 to 2016 data looks less rosy. 2016 purchase application were up 25% year over year in the heat months. 2018 growth is modest and still only at 1998 levels. In this context, the housing market has held up well with higher home prices and higher mortgage rates all through spring and summer. This is a net positive that isn’t getting enough attention.
Cash buyers have been down year over year, as a percentage of total sales for most of the reports this year but are still not down to the levels I expected of 16%-19%. Cash buyers continue to make up a respectable percentage of the total market. In this report we saw another increase in cash buyers, year over year, even as total sales were down, year over year. Last year cash buyers were flat to positive most of the year, on a year over year basis. This year cash buyers have held up better than I expected as a percentage of total sales.
First-time buyers were 32% of sales in July; Individual investors purchased 13% of homes in July; All-cash sales were 20% of transactions in July; Distressed sales were 3% of sales.
Inventory typically increases during the spring and summer months. This report shows that inventory has been flat year over year. The increase, year over year, in last month’s inventory was revised lower (snicker). As the summer season winds down, we have seen some price reductions. Look for some sellers to take their homes off the market so they don’t look desperate to sell. If inventory increases next year and we see more and more negative year over year prints in existing home sales, then the builders will continue to be cautious. The existing home supply is their main competition. I don’t expect we will see 1,500,000 total housing starts this decade, especially considering that new home sales are still so low. In the years 2020-2024, however, we should get to 1,500,000 total housing starts and purchase applications should finally break into the 21st century.
Unsold inventory is at a 4.3-month supply at the current sales pace (also unchanged from a year ago).
The numbers in today’s report are consistent with what I expected for 2018. So far we haven’t breached under my lower range of 5,270,000 SAARS for existing home sales, so there is nothing negative to report here. If one maintains a realistic outlook on the current state of housing economics, then the lack of growth in existing home sales shouldn’t be a surprise. Demand from mortgage buyers during the years 2008 to 2019 housing cycle, has shown slow and steady with record-breaking demand from cash buyers. Growth in the U.S. housing market hinges on increasing the number of mortgage buyers while cash buyers should fall. The real question for the future of U.S. housing economics is if housing tenure will fall when birth rates grow in years 2020-2024.
From Doug Short:
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his own facebook page https://www.facebook.com/Logan.Mohtashami