The pending homes index foreshadows the future. The index trended lower over the past couple months. Existing home sales trended lower last month.
Existing home sales fell 1.8% to an annualized rate of 5.52 million units in June. Sales have found it difficult to gain traction in 2017. Year over year, existing home sales are up only 0.7%.
Everyone is aware of the problems that plague existing home sales. Low inventory and unrelenting price appreciation lead the way.
The median price of an existing home at the national level is $263,800, a 6.5% increase in the median price that existed last year. Supply, on the other hand, dipped 0.5%. Year over year, the supply of existing homes for sale is down 7.1%.
If you think your home will command a better price in the future, you’re less likely to list it today. A self-perpetuating dynamic is at work with existing homes: The more prices rise, the fewer existing homes that come to market.
This dynamic -- of rising prices and falling supply -- hits hardest on the most important demography. Many young first-time buyers find themselves again priced out of the market. First-time buyers accounted for 32% of existing home sales in June, down from 33% in May. This time last year, they accounted for 35% of sales.
As for new home sales, they’ve been brisker of late. New home sales rose 0.8% to 610,000 units on an annualized rate in June. New home sales are up 10.9% year over year.
Lower prices helped move inventory. We’re seeing more discounting with new homes. The median price of a new home is down 3.3% to $310,800. The discounting appears concentrated in the higher echelons of the market. And who would be surprised? Lower-echelon new homes are gone in a New York second because fewer of them are offered for sale. A mere 13% of new homes sold last month cost less than $200,00 compared with 17% in 2016 and 19% in 2015.
Many market watchers view relentlessly rising home prices as a good thing. One market watcher even called rising home prices “the leading strength of the economy.”
It’s more nuanced than that.
For most of us, our house is really more akin to a consumable good. It’s an asset that we use, as opposed to an investment (rental property) to generate cash flow. We wouldn’t view a relentless rise in other consumables, such as fuel or food, as a good thing. We shouldn’t necessarily view a relentless rise in home prices as a good thing.
Of course, one could argue that fuel and food are destroyed when consumed; they’re gone forever. That’s true, but a house will always degrade because of use. Regular maintenance and capital improvements are required to ensure that a house remains a usable asset. A house that is used with no concurrent maintenance and improvement will eventually be destroyed.
We’re not against home-price appreciation. An asset that can maintain its value is generally a good thing. But too much of a good thing can lead to not-so-good things -- a stratified market, a distorted market, and even a bubble market.