Higher Housing Inventory Didn’t Boost Growth In Sales

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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.”

https://loganmohtashami.com/2017/12/31/2018-economic-housing-predictions/

From the NAR: 

Total existing-home sales1https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, did not change from July and remained at a seasonally adjusted rate of 5.34 million in August. Sales are now down 1.5 percent from a year ago (5.42 million in August 2017).  

Total housing inventory3 at the end of August also remained unchanged from July at 1.92 million existing homes available for sale, and is up from 1.87 million a year ago. Unsold inventory is at a 4.3-month supply at the current sales pace, consistent from last month and up from 4.1 months a year ago.

If you follow me you know that am not a fan of the thesis that low inventory is holding back demand for housing. Since 2015, I have warned that the talk about record-breaking demand and low inventory was unwarranted. Mortgage purchase applications are still at 1998 levels.  The housing tenure issue is the bigger problem in housing. Year over year comps show and will continue to show that the best existing home sales prints of the cycle occur when inventory levels are at cycle lows. These higher sales prints occurred during times of low inventory in fall and winter time frame of last year. Just like today you see more year over year negative prints in up coming months.

The housing market in 2018  has two important take-away:

1. 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, the 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  the spring and summer. This is a net positive that isn’t getting enough attention.

From Calculated Risk:
https://www.calculatedriskblog.com/2018/09/mba-mortgage-applications-increased-in.html?
MBASept192018
2. 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 historic  percentage of the total market. In this report cash buyers as a percentage of the market were flat, 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 31% of sales in August; Investors purchased 13% of homes in August; All-cash sales were 20% of transactions; Distressed sales were 3% of sales.

September Cash buyers
Inventory typically increases during the spring and summer months. This report shows that inventory has increased year over year . 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  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. Purchase applications, too, should finally break into the 21st century. We have to be mindful that housing starts decline before a recession but are already really low during this long economic expansion.

Unsold inventory is at a 4.3-month supply at the current sales pace, consistent from last month and up from 4.1 months a year ago.

September Inventory
The numbers in today’s report are consistent with what I expected for 2018. Existing home sales have not hit my estimated lower range of 5,270,000 units, 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 this year. Demand from mortgage buyers during the years 2008 to 2019 housing cycle, has shown slow and steady growth 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 fall. The real question for the future of U.S. housing economics is if housing tenure falls  or stalls when birth rates grow in years 2020-2024

Sales are now down 1.5% from a year ago (5.42 million in August 2017).

September year over year growth neg
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