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US Existing Home Travails Linger as Sales Sink for 2nd Month

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Existing home sales, which make up about 90% of U.S. home sales, sank more than expected in May 2018, marking the second consecutive monthly downfall. It seems that a flourishing economy is giving little boost to the traditional spring homebuying season as supply shortage, higher home prices and rising mortgage rates are somewhat creating hurdles for buyers.

Key Takeaways: Tight Supply Continues to Upset

The National Association of Realtors (“NAR”) said on Wednesday that existing home sales slipped 0.4% to a seasonally adjusted annual rate of 5.43 million units (5.53 million expected) last month from a downwardly revised 5.45 million in April.

Existing home sales decreased 3% on a year-on-year basis in May. This is the third straight month of yearly declines.

Regionally, sales were mixed. Sales in the Northeast rose 4.6%, but that was the only region to register an increase. In the Midwest,South and in the West, sales dipped 2.3%, 0.4%, and 0.8%, respectively.

Sales grew in the Northeast, which accounts for a small fraction of the market, but it dropped in the West, South and Midwest.

Meanwhile, May’s median sales price grew 4.9% from the comparable period a year ago to an all-time high $264,800, marking the 75th straight month of year-over-year gains.

Again, inventory continued to slip, leaving less homes for future sales. The supply of existing homes decreased 6.1% from the year-ago period. However, housing inventory increased 2.8% from April. It would take just 4.1 months to deplete the current supply of homes in the market, according to NAR.

Current Mortgage Rates & Views

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage moved higher to their second highest level this year. It rose eight basis points to an average of 4.62% for the week ending Jun 14, 2018, following a decline for two straight weeks.

Meanwhile, last week, the Federal Reserve hiked funds rate for the second time this year as expected by a quarter percentage point to a range of 1.75% to 2%. Moreover, chances of two more rate hikes this year are high. Hence, mortgage rates are expected to surge further and dilute demand.

Rising mortgage rates and high prices of homes from inventory squeeze are indeed creating hurdles for buyers (mostly first-time). In May, first-time buyers comprised 31% of sales, which is down from both a year ago and prior month level of 33%.

That said, Lawrence Yun, NAR chief economist, believes, “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.”

He further added that a solid U.S. economy accompanied with a healthy labor market should help the housing market reap better gains going forward than what has been seen so far this year.

Builder Confidence Slips

Though consumer demand is still robust, we cannot ignore the current headwinds that are restricting the industry. The confidence level among the nation's homebuilders slipped in June to the lowest level this year and below its six-month average of 70 as tariffs on lumber and other imported materials are coming in the way of buyers’ affordability, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index.

Tariffs on Canadian lumber are pushing up the already high cost for wood, which are fueling prices higher of up to $9,000 for a new single-family home, according to the National Association of Homebuilders.

In addition to the Trump administration's 20% tariff on imported Canadian lumber, imposed in January, the U.S. Government’s recent move of imposing tariff on imported steel and aluminum has also stirred concerns among investors about the construction sector. According to an Associated Builders and Contractors’ (“ABC”) analysis of information provided by the U.S. Bureau of Labor Statistics, May construction material prices increased 2.2% month over month, representing the largest monthly increase in 10 years (since May 2008). On a year-over-year basis, the price of construction materials increased 8.8%.

Our Take

Innumerable problems have been slowing down the homebuilding industry , as evident from the 18.7% year-to-date decline against a 3.7% rise of the S&P 500 Composite. Even big names like Lennar (LEN - Free Report) , D.R. Horton (DHI - Free Report) , PulteGroup (PHM - Free Report) , KB Home (KBH - Free Report) and NVR Inc. (NVR - Free Report) have plunged 17.4%, 17.4%, 11.7%, 17.5% and 11.6%, respectively, so far this year.


Though homebuilders admit to rising labor shortage and land/labor costs, they remain optimistic about a measured recovery this year in tandem with steady economic growth. The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions and interest rates. Although rising interest and mortgage rates, land and labor shortages, and rising material prices raise concerns, the 2018 outlook for homebuilding seems to be solid given strong economic growth and labor market, and a lower tax rate.

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