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posted on 24 January 2017

December 2016 Headline Existing Home Sales Hampered By Historically Low Inventory Levels

Written by Steven Hansen

The headlines for existing home sales improved declined but say that this was "the housing market's best year since the Great Recession [but] ended on a healthy but somewhat softer note". Our analysis of the unadjusted data agrees.

Analyst Opinion of Existing Home Sales

Last month's home sales were elevated by anticipation of higher mortgage interest rates - and this month's sales reversed last months surge. Still it was a good year, but lack of inventory is going to continue to drive home prices higher and constrain real growth in this sector.

Econintersect Analysis

  • Unadjusted sales rate of growth decelerated 18.8 % month-over-month, up 0.2 % year-over-year - sales growth rate trend slightly decelerated using the 3 month moving average.
  • Unadjusted price rate of growth decelerated 1.9 % month-over-month, up 3.0 % year-over-year - price growth rate trend slightly decelerated using the 3 month moving average.
  • The homes for sale inventory significantly declined this again this month, remains historically low for Decembers, and is down 7.7 % from inventory levels one year ago).

NAR reported:

  • Sales down 2.8 % month-over-month, up 0.7 % year-over-year.
  • Prices up 4.0 % year-over-year
  • The market expected annualized sales volumes of 5.450 M to 5.590 M (consensus 5.538 million) vs the 5.45 million reported.

The graph below presents unadjusted home sales volumes.

Here are the headline words from the NAR analysts:

Lawrence Yun, NAR chief economist, says the housing market's best year since the Great Recession ended on a healthy but somewhat softer note. "Solid job creation throughout 2016 and exceptionally low mortgage rates translated into a good year for the housing market," he said. "However, higher mortgage rates and home prices combined with record low inventory levels stunted sales in much of the country in December."

Added Yun, "While a lack of listings and fast rising home prices was a headwind all year, the surge in rates since early November ultimately caught some prospective buyers off guard and dimmed their appetite or ability to buy a home as 2016 came to an end."

"Housing affordability for both buying and renting remains a pressing concern because of another year of insufficient home construction," said Yun. "Given current population and economic growth trends, housing starts should be in the range of 1.5 million to 1.6 million completions and not stuck at recessionary levels. More needs to be done to address the regulatory and cost burdens preventing builders from ramping up production."

"Constrained inventory in many areas and climbing rents, home prices and mortgage rates means it's not getting any easier to be a first-time buyer," said Yun. "It'll take more entry-level supply, continued job gains and even stronger wage growth for first-timers to make up a greater share of the market."

On the topic of first-time- and moderate-income buyers, NAR President William E. Brown says Realtors® look forward to working with the Federal Housing Administration to express why it is necessary to follow through with the previously announced decision to reduce the cost of mortgage insurance. By cutting annual premiums from 0.85 percent to 0.60 percent, an FHA-insured mortgage becomes a more viable and affordable option for these buyers.

"Without the premium reduction, we estimate that roughly 750,000 to 850,000 homebuyers will face higher costs and between 30,000 and 40,000 would-be buyers will be prevented from entering the market," he said.

To remove the seasonality in home prices, here is a year-over-year graph which demonstrates a general improvement in home price rate of growth since mid-2012.

Econintersect does a more complete analysis of home prices with the Case-Shiller analysis. The graphs above on prices use a three month rolling average of the NAR data, and show a 3.6 % year-over-year gain.

Homes today are still relatively affordable according to the NAR's Housing Affordability Index.

Unadjusted Home Affordability Index

This affordability index measures the degree to which a typical family can afford the monthly mortgage payments on a typical home.

Value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite housing affordability index (COMPHAI) of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the COMPHAI then shows that this family is more able to afford the median priced home.

The home price situation according to the NAR:

The median existing-home price for all housing types in December was $232,200, up 4.0 percent from December 2015 ($223,200). December's price increase marks the 58th consecutive month of year-over-year gains.

According to the NAR, all-cash sales accounted for 21 % of sales this month.

First-time buyers were 32 percent of sales in December, which is unchanged both from November and a year ago. First-time buyers also represented 32 percent of sales in all of 2016. NAR's 2016 Profile of Home Buyers and Sellersreleased in late 2016 4 — revealed that the annual share of first-time buyers was 35 percent.

All-cash sales were 21 percent of transactions in December, unchanged from November and down from 24 percent a year ago. Individual investors, who account for many cash sales, purchased 15 percent of homes in December, up from 12 percent in November and unchanged from a year ago. Fifty-nine percent of investors paid in cash in December.

Unadjusted Inventories are below the levels of one year ago.

Total housing inventory at the end of December dropped 10.8 percent to 1.65 million existing homes available for sale, which is the lowest level since NAR began tracking the supply of all housing types in 1999. Inventory is 6.3 percent lower than a year ago (1.76 million), has fallen year-over-year for 19 straight months and is at a 3.6-month supply at the current sales pace (3.9 months in December 2015).

Caveats on Use of NAR Existing Home Sales Data

The National Association of Realtors (NAR) is a trade organization. Their analysis tends to understate the bad, and overstate the good. However, the raw (and unadjusted) data is released which allows a complete unbiased analysis. Econintersect analyzes using the raw data. Also note the National Association of Realtors (NAR) new methodology now has moderate back revision to the data - so it is best to look at trends, and not get too excited about each month's release.

Econintersect determines the month-over-month change by subtracting the current month's year-over-year change from the previous month's year-over-year change. This is the best of the bad options available to determine month-over-month trends - as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).



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