Concerns lurk beneath the good news in May existing-home sales
The big one: Is it sustainable?
Existing-home sales increased in May to their highest pace in nearly six years, according to the National Association of Realtors, but what’s really behind the numbers and what do they mean?
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 5.1% to a seasonally adjusted annual rate of 5.35 million in May from an upwardly revised 5.09 million in April. Sales have now increased year-over-year for eight consecutive months and are 9.2% above a year ago.
This is a rebound from last month, when existing-home sales dropped 3.3% on a monthly basis.
Ed Stansfield, chief property economist at Capital Economics, says that by jumping 5.1% on a monthly basis to 5.35 million annualized in May, existing-home sales reaffirmed their recent upward trend, since the rise was a touch stronger than the consensus expectation of 5.3 million, which means that sales are now 9% higher than this time last year.
“A rebound in sales was always on the cards after the index of pending sales recently increased to a nine-year high. The renewed strength in employment growth and a recent upturn in mortgage lending should support continued strength in the months ahead. However, existing sales are already close to long-run norms, suggesting that there may be a limit to how much further they can rise on a sustainable basis,” Stansfield says in a client note.
He adds that a particularly encouraging sign was the rise in the share of home sales to first-time buyers, which has been unusually low in recent years. Although the rise, from 30% to 32%, was modest, it brought the FTB share to its highest level in almost three years.
This, he says, suggests that the gradual easing in credit conditions over the past few months is helping more FTBs enter the market.
“The recent tight supply conditions continued in May, as new listings failed to keep up with the faster pace of sales. Although the number of existing homes for sale increased to a seven-month high of 2.18 million on a seasonally-adjusted basis, this wasn’t enough to prevent the months’ supply of unsold homes falling to 4.9, from 5.0 previously,” Stansfield says. “This is low by historic standards, and the limited choice of homes for sale in recent months may have been putting off potential buyers. But with the share of homeowners in negative equity continuing to decline and attitudes towards selling improving markedly, supply conditions should begin to loosen in the months ahead.”
Lindsey Piegza, chief economist for Stiffel, meanwhile, says that going forward, in order for sustained improvement in housing demand, consumers will need a consistently improving ability to finance a home purchase.
“In the latest FOMC statement, the Fed noted the housing market ‘has shown some improvement.’ And indeed, home sales have begun to suggest upward momentum after a stagnant, sideways trajectory since late 2012,” she says. “That [consistently improving ability to finance a home purchase] will stem from future improvement in job and income growth. Particularly for the youngest Americans, however, rapidly rising home prices against the backdrop of minimal wage growth continues to pose an extreme and unmanageable barrier to entry.”
Alan, MacEachin, corporate economist for Navy Federal Credit Union, said May's report on national existing home sales was overall encouraging and signals continued improvement in the housing sector.
“A solid increase in the sales pace in May, actually the fastest pace since a federal-government-initiated first-time-buyer program in November 2009, is consistent with the strong jobs market, historically low layoffs, and rising compensation for workers. Another contributing factor may be relaxed down-payment requirements recently implemented by Fannie Mae and Freddie Mac,” MacEachin said.
He is, however, concerned about prices and the concentration of the sales improvement in the higher price ranges.
“With the median price gaining nearly 8% year over year in May, the recent pattern of price increases has significantly outstripped gains in household incomes. Clearly, this trend cannot continue indefinitely,” he says. “Households not in the market will be priced out soon unless price appreciation slows to a rate that would allow more buyers to enter the market. Otherwise, sales could slow sharply in the months ahead.
“The other issue is that most of the improved sales volume is in the higher-priced sector. While overall sales rose over 9% over May 2014's pace, sales of more modestly-priced homes, homes priced between $100K and $250K, rose only 3.6% over last year's pace,” MacEachin said.