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NAR: Existing-Home Sales Increase, Inventory Levels Pose Problem

by James F. McClister

NAR’s report found existing-home sales improved in February, but those gains were offset by skyrocketing home prices.

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Existing-home sales increased modestly in February, a report from the National Association of Realtors discovered, but shallow inventories across the country are quickening the pace of price growth – soon to dangerous levels.

Total existing-home sales inched up 1.2 percent in February, reaching a seasonally adjusted rate of 4.88 million and marking a 4.7 percentage point increase from a year prior. The gain was a welcome boon in the wake of a slow January, but low inventory levels (4.6-month supply nationally) continue to plague buyers, forcing the escalation of home prices to their highest pace in a year.

As of February, median existing-home price for all housing types was $202,600 – 7.5 percent above February 2014 – which represents three full years of consecutive year-over-year price gains. However, as we recently reported, the true price of homeownership goes far beyond what’s initially listed, as buyers take on the living expenses particular to any given area.

A Winter Weather Beat Down

Broken down regionally, sales performance varied, but home prices universally climbed:

  • February existing-home sales in the Northeast dropped 6.5 percent to an annual rate of 580,000, but are still 3.6 percent above a year ago. The median price in the Northeast was $241,800, which is 3.3 percent above a year ago.
  • In the Midwest, existing-home sales were at an annual level of 1.08 million in February, unchanged from January and 4.9 percent above February 2014. The median price in the Midwest was $152,900, up 8.8 percent from a year ago.
  • Existing-home sales in the South increased 1.9 percent to an annual rate of 2.11 million in February, and are now 6.0 percent above February 2014. The median price in the South was $177,900, up 8.5 percent from a year ago.
  • Existing-home sales in the West climbed 5.7 percent to an annual rate of 1.11 million in February, and are now 2.8 percent above a year ago. The median price in the West was $290,100, which is 4.2 percent above February 2014.

NAR Chief Economist Lawrence Yun explained the regional variations as a matter of weather.

“Severe below-freezing winter weather likely had an impact on sales as more moderate activity was observed in the Northeast and Midwest compared to other regions of the country,” he said.

Crawling to Win the Race

The direction sales take will hinge largely on how builders respond to poor inventory levels and homeowners’ confidence in the market. Yun fears that despite February’s gains, forthcoming interest rate increases could damage the position of potential homebuyers.

“With all indications pointing to a rate increase from the Federal Reserve this year – perhaps as early as this summer – affordability concerns could heighten as home prices and rents both continue to exceed wages,” he added.

Yun went on to explain how stronger price growth is a benefit for homeowners hoping to build additional equity, perhaps lifting them out of near negative or negative equity. However, he tacked on a caveat, saying, “It continues to be an obstacle for current buyers looking to close before rates rise.”

The hope is that as warmer weather rolls in, builders will ratchet up production while newly confident homeowners look to play their hand at the market – many hoping to make a vertical move. As inventories refill, home price gains, particularly in the hottest portions of the country, like California, Texas and Florida, will relax into a smolder and allow the rest of the nation to catch up.

Unfortunately, the recent direction of homebuilding, which is aimed firmly at the higher end of the spectrum, is shaping a market landscape suitable mainly for wealthy buyers. In 2014, sales for new homes priced $400,000-plus outpaced the sale of homes priced below $199,999 for the first time in history, marking a radical shift in the way builders conduct business.

Should that trend continue, the damages to long-term affordability would be considerable and profoundly influential on housing’s direction.

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