After increasing to the highest annual rate in six months, existing-home sales tumbled in February amidst very low supply levels and robust price growth in several sections of the country, according to the National Association of Realtors. Led by the Northeast and Midwest, all four major regions experienced sales declines in February.
And though several of the Fed’s Open Market Committee are still pushing for higher interest rates, there is still little sign of inflation at the wholesale or retail level, which means wages are not rising fast enough (that aprox. 2/3rds of product costs) to boost consumer demand, and hence economic growth.
Total , which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 7.1 percent to a seasonally adjusted annual rate of 5.08 million in February from 5.47 million in January. Despite last month's large decline, sales are still 2.2 percent higher than a year ago.
, NAR chief economist, said existing sales disappointed in February and failed to keep pace with what had been a strong start to the year. "Sales took a considerable step back in most of the country last month, and especially in the Northeast and Midwest," he said. "The lull in contract signings in January from the large East Coast blizzard, along with the slump in the stock market, may have played a role in February's lack of closings. However, the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers."
Year-on-year, the producer price index (for wholesale goods and services), at dead zero, is a full 1 percentage point below the CPI while the producer core rate, at plus 1.2 percent, is 1.1 percentage point behind the CPI core.
So there is really no reason to worry about inflation. The Fed should instead be concerned with boosting growth. As the primary Presidential debates are highlighting, the various trade agreements have sent most of the high-paying blue collar jobs overseas. What is left? The lower-paying service sector jobs, such as in health care.
There is the hope that housing will boost construction jobs, which are higher paying. Indeed, the lower February existing-home sales are mainly due to the lack of inventory, which is down to a 4.4 month total, and the consequent higher prices.
"The overall demand for buying is still solid entering the busy spring season,” said Yun, “but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers."
The median existing-home price for all housing types in February was $210,800, up 4.4 percent from February 2015 ($201,900). February's price increase marks the 48 consecutive month of year-over-year gains.
And total housing inventory at the end of February increased 3.3 percent to 1.88 million existing homes available for sale, but is still 1.1 percent lower than a year ago (1.90 million). That is why unsold inventory is at a 4.4-month supply at the current sales pace, up from 4.0 months in January.
Dr. Yun speculates part of the inventory decline may be due to large funds that are still buying up vacant units. "Investor sales have trended surprisingly higher in recent months after falling to as low as 12 percent of sales in August 2015," adds Yun. "Now that there are fewer distressed homes available, it appears there's been a shift towards investors purchasing lower-priced homes and turning them into rentals. Already facing affordability issues, this competition at the entry-level market only adds to the roadblocks slowing first-time buyers."
Rising housing prices do boost inflation, but rising incomes even more so. So when incomes aren’t rising more than, say, 2.5 percent per year, then housing prices cannot rise much faster. The biggest constraint on housing today, even with still ultra-low interest rates, is in fact static household incomes.
Harlan Green © 2016
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