Something is up, or more likely down, with the U.S. housing market. And the reconstruction after Hurricane Harvey may not do much to help.
Here's the evidence:
The latest take on home-builder sentiment showed that buyer traffic stubbornly remains in negative territory, despite some of the highest readings of the current cycle on builders’ expectations for sales gains in the next six months.
In addition, recent mortgage rate declines have not led to an increase in applications to buy a home. Over the past few weeks, purchase activity has slumped to a six-month low, even though rates are at their lowest level since November. This defies a central tenet of the housing market that falling rates naturally lead to an uptick in sales.
As for actual sales volumes, both new and existing July home sales missed forecasts by wide margins. At an annualized rate of 571,000, new home sales dropped to a seven-month low, well off their long-term average pace of 727,000. The number of homes on the ground rose to 276,000 units, the highest since June 2009. At July’s pace, it would take 5.8 months to clear the inventory.
The existing home sales report that followed was similarly weak, with closings sliding to the lowest since August 2016. Not only was the 5.44-million annualized pace 110,000 units below forecast, July’s figures reveal the all-important spring selling season was something of a bust, given July’s data captured contracts signed from April through June.
Prices have been and remain the main impediment. The median new home sales price of $313,700 marked the highest July price on record and is up more than six percent over last year’s level. At an annual gain of 6.2 percent, the best that can be said of the median sales price for previously occupied homes is that it’s off the record pace it set in June. Corroborating the slowdown in sales, both the Federal Housing Finance Agency and S&P Case-Shiller home-price indexes have softened unexpectedly.
As has been the case since housing collapsed over a decade ago, the missing contingency in the current recovery is the first-time home-buyer. In a normal market, first-timers comprise 40 percent of buyers. In July, they made up a third of the market, which is one of the highest reads of the current cycle.
What's certain is that the run-up in home prices has not been helpful for millennials aiming to stop renting or even move out of their parent’s homes. The latest results from the University of Michigan Survey of Consumer Confidence Sentiment speak volumes. While all buyers have expressed dismay at home price gains, those between the ages of 18 and 34 have been particularly alarmed.
The survey also showed an expanding pool of those with a dour perception on housing. Thanks to high prices, both upper- and lower-income cohorts as well as those in the West and the South now say they’re pessimistic about buying a home. Likewise, prime-age buyers (ages 35-54) are now echoing their younger counterparts’ laments about prices.
Looking ahead, pending home sales suggest the summer’s data are anything but an aberration. The pending home sales index has fallen in four of the last five months, with July coming in particularly weak, down 0.8 percent compared to the consensus forecast, which called for a rise of 0.4 percent.
For years, Lawrence Yun, chief economist at the National Association of Realtors, has cited constrained inventories of homes as the main driver of any weakness in the sales figures. After the recent spate of disappointments on the pending home sales front, Yun added the following perspective on prices: Over the past five years, median home prices have risen 38 percent while hourly earnings have increased by just 12 percent. This yawning gap has pushed affordability to its lowest level since 2008.
Tellingly, the most recent data from Challenger, Gray & Christmas revealed a jump in construction worker layoffs. The mitigating factor will be the tremendous demand for workers to repair and eventually rebuild Houston and the surrounding region after the devastation wreaked by Hurricane Harvey.
What is less of a certainty is the long-term effect of the storm. About 1.2 million homes in and around Houston were at moderate to high risk for flooding but aren't in a designated flood zone that would have required insurance. Many will qualify for federal disaster relief. Still, the government program comes in the form of low-interest rate loans to help shoulder the burden of repair costs at a time when many households are already buried in debt with precious little in savings; as the third quarter got underway, the saving rate fell to 3.5 percent, a fresh low for the current cycle.
Although many have drawn comparisons to the aftermath of Hurricane Katrina, Harvey will affect more than twice as many mortgaged properties. According to Black Knight Financial Services, of the 1 million or so mortgaged homeowners in the disaster area, more than 75,000 will become delinquent within two months, and 45,000 are at risk of becoming seriously delinquent or even face foreclosure inside a four-month period.
As per the Mortgage Bankers Association, homes in foreclosure nationwide totaled 502,437 in the second quarter, exemplifying the very real potential for Harvey to leave a huge scar on the housing market.
It is clear investors are banking on the rebuilding effort becoming its own macroeconomic engine of growth. With housing clearly peaking, the nearer-term risk is that Harvey’s devastation solidifies broader market woes.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of "Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America," and founder of Money Strong LLC.
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