Understanding the Housing Market (without a Crystal Ball) Part II

August 23, 2019

Last time we talked about the status of the housing market in general, as well as the factors to look at when trying to understand it. 

As a reminder, here are the indicators you should keep an eye on to better understand the future of the housing market:

  • Home prices (covered in Part I)
  • Home sale volume
  • Home Construction
  • Available housing inventory
  • Mortgage rates

Today we’re going to be talking about the remaining four factors. As always, if you have any questions at all, give us a call or email and we’re happy to help!

Home Sale Volume

Soaring home prices usually dampen sale volumes. In January 2019, National Association of Realtors (NAR) recorded about a one percent monthly decrease in the number of sales, which, nationally, totaled roughly 5 million transactions. Year-over-year, the drop was 8.5 percent, with the greatest decline in sale volume occurring in homes that sold for $250,000 or less.

 “In the past, when housing went down for a long period, it dropped the rest of the economy down,” Yun says. “But when housing retreats only for a short period and recovers, then the economy is fine.”

With positive job growth and mortgage rate reductions, sales – which usually peak in spring and summer – may improve.

As you read about home sales, be sure to note if the data is based on all sales, existing sales or new home sales. As a reflection of only new construction properties, new home sales capture an exclusive segment with higher prices and can mean different things for the local market.

“New-home sales are a very small part of the market, generally less than 10 percent,” Yun says. “Sometimes it can be as low as 6 or 7 percent of all transactions.”

Home Construction

Residential construction, reported by the U.S. Census Bureau and HUD, offers a barometer for future supply. More than one million housing units reached completion in 2018, or more than two percent more than the 2017 tally, according to the U.S. Census Bureau.

The year-over-year boost obscures labor shortages and material-cost surges, some of which emanate from the Great Recession, when construction halted and the industry shrank overall.

Available Housing Inventory

The quantity of homes for sale hinges on disparate factors. Recently escalating prices, for instance, surpassed the means of many potential buyers, especially first-time homebuyers, letting the number of available homes rise.

In December 2018, new home inventory – at 344,000 – accounted for a six-month supply, according to HUD information. Existing housing shaped a harder market with 1.59 million properties, a pace that kept less than four months of inventory on the market. This, though, is better than earlier in 2018.

“The spring of last year was one of the tightest market conditions – just not enough homes for sale,” Yun says. “(S)ome loosening in the inventory is a welcoming sign.”

Today’s still modest inventory counters the boon that defined the mid-2000s. There are various explanations why stock has hovered at historic lows ever since. Construction is consistently down. Owners, according to NAR’s “Profile of Home Buyers and Sellers,” live in their homes for nearly a decade, several years longer than prior to the 2008 bust.

Mortgage Rates

After reaching a nearly eight-year high in December, at 4.55 percent, mortgage interest rates are now sliding, forging a more favorable financial outlook for buyers.

“The Federal Reserve has changed its policy from December to indicate it is going to be patient and the way to read that is to say that the Federal Reserve will not raise interest rates in 2019,” Yun says. “Hence, just change in that tone has led to a fall in mortgage rates.”

Mortgages also shift with the appetite for 10-year Treasury bonds. When risk grows, investors prefer safe, government-issued securities. As a result, prices shoot up and interest, including mortgage rates, goes down.

Other Tools & Considerations

  • While home prices, sales, construction, stock and mortgage rates are all essential indicators for the real estate market, others also harbor insights. Household-formation and homeownership rates reveal prospective demand. So do job creation and wage growth. Student debt, which could affect purchasing power, is another useful metric, alongside buyers’ changing preferences.
  • On the supply side, trade deals and building regulations impact construction, while financial and personal matters may motivate sellers.

So as you can see, no one-stop shop exists for you to get a handle on the housing market but if you look at all the factors here, you’re going to be a housing market pro (even if you need to call and ask us a question or two!).


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