That Darn Supply

Whenever talk turns to home sales, you can be sure it will also turn to home supply, and for good reason. 

Existing home sales dropped 2.8% to a lower-than-expected 5.49 million on an annualized rate. Most market watchers were expecting better (including us). One positive in the sales data was November sales, which were revised up to 5.65 million on an annualized rate. 

December sales had trouble gaining traction for the same reason they’ve had trouble gaining traction in most down months — supply.  The NAR reports the number of homes for sale fell 11% for the month to 1.65 million. At the current sales pace, supply, at 3.6 months, is at the lowest level since 1999. If you don’t have a lot to sell, it’s hard to sell a lot. 

Interestingly, many sellers were unable to exploit their advantage. The median price of an existing home was down 0.9% to $232,200 in December. If demand holds steady and supply drops, prices should rise. (It’s possible demand also dropped on higher interest rates, though purchase-mortgage activity suggests otherwise.) Of course, we all know that housing markets are local markets, and what holds for the national market won’t necessarily (and likely won’t) hold for any particular local market.

Investment is another variable impacting home supply. Over the past five years, a record number of homes, most notably single-family homes, have been converted to rentals. We’ve seen this conversion occur on an unprecedented institutionalized scale, with large investment firms buying hundreds of thousands of homes. What’s more, most of these conversions have occurred at the lower end of the market, thus driving up prices for what would be starter homes for first-time buyers. 

Increased construction activity helps, but it’s not helping enough. Housing starts were up 11.3% to 1.226 million on an annualized rate last month. But the surge was confined to multi-family starts, which jumped 57%. The more important single-family category actually declined 4%.

Though home constitution has trended higher in recent years, it hasn’t trended high enough. The historical annual average for starts is around 1.5 million. NAR economist Lawrence Yun has mentioned that excess regulation — concerning land use in particular — has held construction in check. 

Love him or hate him (there is no middle ground), President Trump has vowed to reduce business regulation across the board. Should Trump follow through, we should see a pick-up in new-home construction.