Markets rarely progress on a purely linear path, whether it be up or down. This includes the home-sales market.
Both new- and existing-home sales have meandered more than usual lately. Last week, new-home sales fell considerably short of the consensus mark, dropping 10.4% in December compared with November. A few days before that, the data on existing-homes sales showed that their sales also came in short for the month (though not to the degree of new-home sales)
We see no reason for alarm. Year over year, new home sales are up, as is home builder sentiment. In fact, sentiment continues to hover near a multi-year high. Home builders continue to build, and build more than what they’ve built in previous years. No doubt, they expect to sell more homes this year.
As for existing-home sales, they’re at a 10-year high. Looking at the recent pending home sales index, sales should build on recent momentum to hit more multi-year highs. The index rose a strong 1.6% in December. This portends higher existing-home sales for January and February.
We remain enthusiastic, though a recent NAR survey would appear to dampen our enthusiasm. The NAR surveyed a range of adults, from homeowners to those who lived with a family member. The good news is that 80% of the respondents still consider homeownership to be part of the American dream. The bad news is that only 55% consider NOW the ideal time to buy a home. This was down from 63% in the third quarter.
The spike in mortgage rates no doubt contributed to the drop in the immediate attractiveness of a home. Higher mortgage rates obviously impact affordability. But as people get used to the new normal (4%-plus on a 30-year loan), the attractiveness of owning a home should rise.
The Census Bureau’s latest Residential Vacancies and Homeownership report offers other reasons to remain enthusiastic. The homeownership rate hit a 51-year low in the second quarter of 2016. But the report shows an uptick in the homeownership rate in both the third and fourth quarters, with the rate posting at 63.5% and 63.7%, respectively. The report also shows that the rental vacancy rate increased to 6.9% in the fourth quarter.
We might be twisting ourselves into a knot to reach a conclusion, but hear us out: If vacancy rates and homeownership rates are trending higher, this suggests that more people are cycling out of the rental market and into the owner-occupied market. Our logic isn’t unreasonable when you consider both vacancies and ownership rates are at a level unseen in decades. Trends don’t rise to the sky, nor do they fall to the earth. Both directions eventually reverse course. We think both trends are close to reversing, if they haven’t already.
Of course, any new trend won’t be a linear progression, but we’ll take a nonlinear progression if it means more people embracing homeownership.