A seller’s market with few sellers
Wednesday, June 27, 2018
Historically, the second quarter is one of the busiest times of the year for home sales. Currently, however, high demand and prices have created a seller’s market, but few sellers.
That has been a boon for builders, but it also means many would-be buyers are shut out of the market at present.
Construction of new homes (in units) rose 5 percent in May, compared to April, the industry’s biggest increase since January, and is up more than 20 percent for the year.
Single-family construction for the month grew by nearly 4 percent. In addition, completions were up nearly 2 percent over April and 10.4 percent compared to last year, with single-family completions soaring 11 percent.
By dollar volume, new residential construction stayed more or less flat for the month, although it is up 5 percent over last year, according to Dodge Data & Analytics. Multifamily construction leapt 13 percent from April, while single-family fell 4 percent.
Despite the upward trend, builders have concerns that rising construction costs and mortgage rates may place a drag on future activity. The National Association of Home Builders stated that its Home Market Index, which measures builder confidence, decreased by two points in June, with builders reporting a slight slowdown in buyer traffic and decreased expectations for sales in the next six months.
Those sentiments were reflected in a drop in permit requests in May, down 4.6 percent from April, including a 2.2 percent drop in single-family permits.
Sales of new homes jumped 6.7 percent, the highest level since last November, and are up 14 percent for the year. Activity was greatest in the South, where sales rocketed nearly 18 percent compared to April.
The median ($313,000) and average price ($368,500) of a new home decreased somewhat from the previous month and the previous year, but were still well above the median sales price of an existing home ($264,800). Builders have been trying to hold down prices to make inventory more affordable, particularly for the underserved entry-level market.
Inventory of existing homes climbed in May, by 2.1 percent, which helped prevent sales sliding even more. The National Association of Realtors reports sales dipped only slightly, by 0.4 percent, following a 2.5 percent decline in April.
Sales of existing single-family homes dropped 0.6 percent. On the whole, inventories are down 6.1 percent compared to last May, and annual sales are off 3.0 percent. The shortage has resulted in rising prices (up 5 percent from a year ago) and a rapid turn-around, with more than half of available properties selling in 30 days or less.
Clearly, it is a seller’s market at present. Fannie Mae said that its Home Purchase Sentiment Index (HPSI) nosed up 0.6 points in May, to a new all-time high (92.3), largely due to a 46 point hike in the proportion of owners who said now is a good time to sell a home.
Ironically, those same conditions are keeping many homeowners from selling.
As Doug Duncan, chief economist for Fannie Mae, explains, "The perception of high home prices that underlies this optimism cuts both ways, boosting not only the good-time-to-sell sentiment but also the view that it’s a bad time to buy, and presenting a potential dilemma for repeat buyers."
The net share of HPSI participants who believe now is a good time to buy plummeted 28 points last month. Consequently, the number of would-be buyers, especially renters, has fallen off. Mortgage lenders report demand for both home purchase and refinance mortgages have reached their lowest levels in three years.
Still, demand continues to outstrip supply. Pending home sales in May receded 0.5 percent on the heels of a 1.3 percent retreat in April and have been in decline for the past five months on an annualized basis.
The reason, said NAR Chief Economist Lawrence Yun, was not weakening demand but insufficient supply. Reversing the trend in new home sales, pending sales of existing homes were down in the South but up in the Northeast, Midwest and West.
Affordability is another challenge for the industry.
"With the cost of buying a home getting more expensive, it’s clear the summer months will be a true test for the housing market," remarked Yun. At present, the NAR has already downgraded its economic forecast, anticipating negative growth for realtors by year’s end.
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