By Amanda Fung

Yahoo Finance

A number of key reports on housing data released in recent days are on a downward trend. Both existing and new home sales in the U.S. were down in June, and their previous month’s results were revised lowered. The lackluster sales data caused homebuilder confidence to plummet to its lowest level in 10 months Wednesday.

“The housing market has been losing momentum for several months,” said Stifel Chief Economist Lindsey Piegza, referring to a slump in housing starts, building permits, and sales during the second quarter. “Housing is a solid gauge of the overall health of the economy; weakness in housing raises a large red flag regarding the sustainability of domestic growth heading into the second half of the year.”

The U.S. Commerce Department said the sale of new U.S. single-family homes in June fell 5.3% to a seasonally adjusted rate of 631,000 — an eight-month low — and the previous month’s results were revised lower. While new home sales only account for 10% of the market, the latest existing home sales results weren’t any better.

Existing home sales fell for the third straight month in June. Existing home sales slipped 0.6% to a seasonally adjusted annual rate of 5.38 million units last month, down 2.2% from June 2017, according to the National Association of Realtors (NAR). May’s sales pace was revised down to 5.41 million units from 5.43 million units.

“Existing home sales help drive other sectors of the economy including consumer confidence and spending, as well as construction and lending activity,” Piegza said.

“Chronically low inventory is choking sales,” said Jonathan Miller, president and CEO of Miller Samuel Inc., a real estate appraisal firm, adding that higher-cost housing markets such as New York City and San Francisco are seeing a slowdown in sales more so because of homebuyers’ uncertainty over the Trump administration’s federal tax reform.

Inventory levels have fallen for three consecutive years and for eight of the past 10 years, according to Lawrence Yun, NAR’s chief economist. At the current sales pace, it would take 4.3 months to exhaust the total inventory of homes for sale; six months is considered a balanced market.

“Throw in rising mortgage rates… that isn’t helpful in terms of sales activity,” Miller said. While the rate increases are currently nominal for Americans living paycheck to paycheck, it’s enough to sway a person’s decision to make that home purchase. On Thursday, the average rate on a 30-year, fixed-rate mortgage rose to 4.54% from 4.52%, a week earlier, according to mortgage buyer Freddie Mac, adding that long-term loan rates have been running at their highest levels in seven years.

“Affordability pressures are increasingly a concern in many markets, as the combination of continuous price gains and higher mortgage rates appear to be giving more prospective buyers a pause,” said Freddie Mac Chief Economist Sam Khater in a press statement.

The slow sales activity is particularly perplexing because spring tends to be the busiest time of year since it’s known as buying season. Moreover, the economy has been humming along: The U.S. economy grew by an annualized rate of 4.1% in the second quarter — the fastest growth since the third quarter of 2014. 

The housing affordability crisis

The problem is wage growth. When you adjust for inflation, wages haven’t risen in a decade, experts note. As the lack of inventory drives home prices up, affordability becomes an issue. Wages aren’t keeping pace and consumers are priced out of markets by 6%-8% — depending on which home price index you look at, in terms of home values and wages, according to Piegza.

Median home prices in the U.S. have increased annually for 76 straight months (a little over 6.3 years), according to the NAR. In June, the median price of an existing home was $276,900, up 5.2% from the same time last year.

But experts expect prices to follow other housing data. “Home prices are the kaboose of the train,” Miller said. “You’ll’ see prices soften this year.”

We may already be seeing signs of prices leveling off. Standard & Poor’s said that its S&P CoreLogic Case-Shiller national home price index posted a 6.4% annual gain in April, down from 6.5% from a month earlier. May results will be released July 31. Meanwhile, the FHFA House Price Index rose 0.2% in May, one-tenth of a percentage point less than expected, according to Bloomberg.

“While we’re not seeing the rug pulled out of the housing market, there are clear signs and a reason for caution,” Piegza said.

by Prashant Gopal and Shobhana Chandra

Bloomberg

They were fed up with Seattle’s home bidding wars. They were only in their late 20s but had already lost two battles and were ready to renew with their landlord. Then, in May, their agent called.

Suddenly, Redfin’s Shoshana Godwin told the couple, sellers were getting jumpy, even here in the hottest of markets. Homes that should have vanished in days were sitting on the market for weeks. There was a three-bedroom fixer-upper just north of the city going for $550,000, down from more than $600,000. They made the leap in early June and had closed by the end of the month, for list price.

The U.S. housing market — particularly in cutthroat areas like Seattle, Silicon Valley and Austin, Texas — appears to be headed for the broadest slowdown in years. Buyers are getting squeezed by rising mortgage rates and by prices climbing about twice as fast as incomes, and there’s only so far they can stretch.

“This could be the very beginning of a turning point,” said Robert Shiller, a Nobel Prize-winning economist who is famed for warning of the dot-com and housing bubbles, in an interview. He stressed that he isn’t ready to make that call yet.

The Data

A slew of figures released over the past three days gives ample evidence of at least a cooling. 

Existing-home sales dropped in June for a third straight month. Purchases of new homes are at their slowest pace in eight months. Inventory, which plunged for years, has begun to grow again as buyers move to the sidelines, sapping the fuel for surging home values. Prices for existing homes climbed 6.4 percent in May, the smallest year-over-year gain since early 2017, and have gained the least over three months since 2012, according to the Federal Housing Finance Agency.

“Home prices are plateauing,” said Ed Stansfield, chief property economist at Capital Economics Ltd. in London. “People are saying: Let’s just bide our time, there’s no great rush. If we wait six or nine months we’re not going to lose out on getting a foot on the ladder.” That means “we’re now looking at a period in which prices move more or less sideways, or increase no more quickly than growth in incomes, over the next few years.”

Stansfield projects a 5 percent gain this year and a 3 percent increase in 2019. That compares with 10.7 percent in 2005, shortly before the crash.

Supply Lines

Some of the most expensive markets, where sales are falling under the weight of prices, are now seeing substantial increases in supply, according to Redfin Corp. In San Jose, California, inventory was up 12 percent in June from a year earlier. It rose 24 percent in Seattle and 32 percent in Portland, Oregon. Those big jumps are from low numbers, so the housing crunch is still a serious problem.

“Inventory has increased quite a bit,” Godwin, the Seattle agent, said. “We’re seeing less competition.”

Dustin Miller, an agent with Windermere Realty Trust in Portland, said he’s trying to manage sellers’ expectations, something he hasn’t had to do since the end of the last housing boom. One customer, a baby boomer moving to a new home across the state, expected to have buyers fighting over her house. She got one bid, below her asking price.

“Buyers want to shop and take some time, as opposed to having to rush and throw offers in,” Miller said. “It’s the market correcting itself. At some point, you hit a peak of momentum, and then things level off.”

This new wariness was noticeable in the latest consumer-sentiment data from the University of Michigan. In its preliminary July survey, 65 percent of Americans said it’s a good time to buy a home, the lowest since 2008, when the economy was still in recession.

Still, market watchers note that the housing sector has strong support from a healthy labor market and steady economic growth, which indicates a stabilizing trend for home prices rather than anything close to the experience of the crisis, when property values plunged.

“The rate of home sales, new and existing, has probably peaked,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But it’s not going to roll over. It will gently decline.”

New Record

S&P CoreLogic Case-Shiller data hint at the softening. The 20-city index of property values rose 6.6 percent in the 12 months ending in April. After seasonal adjustments, the gauge posted its smallest monthly increase in 10 months, with New York, San Francisco and Washington reporting declines.

Homeownership still remains out of reach for many Americans, especially for first-time and younger buyers. For existing homes, the median price climbed in June to a record $276,900, while properties typically stayed on the market for 26 days, unchanged from the prior three months, according to the National Association of Realtors.

“Affordability is becoming a major headache for homebuyers,” said Lawrence Yun, the association’s chief economist. “You are seeing home sales rising in Alabama, where things are affordable. But in places like California, people aren’t buying.”

In addition, “no one knows how far and how fast” borrowing costs may rise as the Federal Reserve raises interest rates, Stansfield said. Lenders and borrowers alike are less likely to let credit spiral out of control than in 2005 and 2006. And with financing tighter and wage gains in check, “there’s not much scope for prices to continue to increase sustainably” at recent rates, he said.

The cooling, in turn, could curb housing starts, “because builders tend to only build what they think they can confidently sell,” Stansfield said. At the same time, he said, “it will decrease the risk of a bust.”