The yin and yang of housing news this week was a very good construction report and the second bad one in a row for existing home sales. Those sales are now running below those a year ago. Together however they point toward an increase in housing inventories. This could cool a heated market and slow increasing prices that are approaching unsustainable in a lot of markets.
The Federal Reserve’s February minutes indicate that all systems are a go for more interest rate increases.
While the two biggest housing items of the week pulled in different directions, together they could be a positive for homebuyers.
The lack of residential construction since the recession has been puzzling. Despite low interest rates and other favorable conditions, home builders have, in relative terms, been twiddling their thumbs. New construction has not even kept up with the number of housing units removed from the stock through age, demolition, or conversion and has helped drag the homes-for-sale inventories to their lowest levels in 19 years. New home inventories are a little more robust than those for existing homes, but overall the supply restrains homeowners from putting their homes on the market. This has been one of the biggest drivers of the rapidly rising cost of houses.
The construction end of the supply chain seems to be slowly sorting itself out. The number of permits and housing starts have good months and bad ones but are slowly trending higher. January was a very good one. Permits rose by 7.4% compared both to December and to a year earlier and starts were up 9.7% and 7.3% from the two respective earlier periods. What did consistently increase almost every month in 2017 and in January is the number of residential units under construction, boding well for the future.
Home Sales Off
Existing home sales did not have a good month, the second one in a row. The annual rate of 5.38 million sales was down 3.2% from December, and that rate, first reported at a 3.6% deficit compared to November, was revised even lower. After the two-month slump now, January’s sales rate is 4.8% lower than in January 2017, the largest annual decline since August 2014.
So where are the roses and buttercups in all of this? We await next week’s new home sales numbers, but slowing sales mean increasing inventories; and the existing home stock increased 4.1% last month. A 3.4-month supply isn’t a solution; a balanced market requires nearly twice that, still, it is progress. If construction catches up with demand, inventories will equalize more quickly, cooling the market a bit, and slowing price gains.
The minutes of the Federal Reserve’s Open Market Committee (FOMC) February meeting, the so-called Beige Book, were released on Thursday. The Fed did not touch the fed funds rate at that meeting, but the minutes indicate they have upgraded their economic outlook based on the strength of recent data, “accommodative financial conditions” and the expected impact of the new tax law. It is clear their plans still call for three rate hikes this year. Many analysts now suspect there will be four.
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