June 20, 2018
New data on existing home sales just out from the National Association of Realtors (NAR) for May show that sales volume is now 3.0 percent below a year ago and has fallen year-over-year for three straight months. And NAR revised the number for the prior month downward, so the reading is even weaker. The 5.43 million May figure (an annualized rate) was a disappointment relative to what most analysts had predicted.
The new report highlights that inventories are extraordinarily low right now, meaning that home prices are hitting record levels, and that some would-be buyers are being crowded out.
The Realtors stated in their release:
“Incredibly low supply continues to be the primary impediment to more sales, but there’s no question the combination of higher prices and mortgage rates are pinching the budgets of prospective buyers, and ultimately keeping some from reaching the market.”
The new report shows that there is only a 4.1 month supply of listings, at the current pace of sales, which is far below normal, and which explains the high prices.
Prices have reached a point where (combined with higher mortgage rates) they are giving pause to many home buyers. The median existing-home price for all housing types in May was $264,800, an all-time high and 4.9% higher than the May 2017 figure ($252,500). The release noted that May’s price increase marks the 75th straight month of year-over-year gains.
And, by the way, first-time buyers are being outbid; they only constituted 31 percent of sales in May, which is down from 33 percent both last month and a year ago.
There are three key trends at work here, each feeding on each other: low inventories, high prices, and low but rising mortgage rates (now at 4.6%, compared with 3.4% a year ago). The shortage of homes for sale relative to demand has led to competitive bidding among home buyers. This is driving prices out of reach for many and forcing would-be buyers to examine other options. If they can’t find what they want in the marketplace, and if they don’t need to move to a different location, many will choose to remodel, expand, or update the home they have. If they need more space, they can often convert a garage or basement, or make more efficient use of their space using closet organizers.
The new study just released by us here at HomeAdvisor, called True Cost Report 2018, shows that the most common reasons would-be movers want a different home have to do with aesthetics and space — much more than needing to move for a job. To the extent that they don’t have a ‘mandate’ to move, they can have their needs met through remodeling, conversions, or additions. This is one reason why 82 percent of millennials, 70 percent of Gen Xers and 60 percent of baby boomers anticipate spending as much or more on home projects in the next twelve months than they did in the prior year (findings from the True Cost Report).
As mortgage rates continue to move higher, this trend of people staying put and remodeling will intensify. The reason: people with a locked-in 3% mortgage rate will be reluctant to give up that low rate to move (and get a new mortgage at a higher rate).