posted on 26 March 2016
-- this post authored by Sam Khater
The recent correction in the equities market has underlined a strong correlation between stock performance and sales of high end houses. As the stock market swooned in recent months, so has the volume of sales for $1 million-plus homes.
This has been the case in the past, and recent performance of both the equities and the upper end of the housing market suggest this trend is continuing.
The powerful 'wealth effects' generated by the rapid rise in equities between 2009 and 2015 drove a large rise in the sales of homes that sold for $1 million or more.
Historically, sales of homes priced $1 million or more averaged 1.2 percent of all home sales. The spread between high-end sales and equities widened during the housing bubble but then moved more closely in unison. By the time the equity markets had peaked in May 2015, the $1 million or more share of the market had nearly doubled, averaging 2.2 percent for the remainder of the year.
Since its peak in May 2015, the S&P Index declined 10 percent as of mid-February (with some rallying the past 10 days). This decline in the S&P Index was matched by a 30 basis point or 15 percent decline in the $1 million or more share, which fell from 2.3 percent in November of last year to 2.0 percent in January 2016.
What will happen next depends upon both the trajectory of the stock market and, growing inventory levels.
While the inventory of homes priced below $500,000 remains very tight, the inventory is beginning to increase for all segments above that marker and especially for the $1-million segment.
In December 2014, there was a 9.3 months supply of homes for homes listed at $1 million or more, but that increased to 13.0 months by December 2015. This was the highest supply since January 2012 when inventories were high but rapidly declining and home prices were about to rebound. With more than a year's supply of inventory, prices, for the most part, won't be increasing.
The inventory situation began deteriorating in early 2015 when the year-over-year change in inventory started to outpace sales growth, a sure sign of an impending slowdown (Exhibit 3).
The slowdown in sales has begun to creep down the price spectrum and is beginning to occur for homes listed at $700,000 and above. This is consistent with the strong correlation between high- end sales and the stock market movements.
Going forward, equities remain key. If the markets continue to weaken, look for high-end sales to fall further, and inventories to climb. If the market stabilizes, as it has shown signs of doing most recently, the high-end market will stabilize as well.
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