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.
Consider Locking on the Pullback
Mortgage rates have mostly cycled within a tight range for 2017. When rates have pulled back and cycled down, an opportunity to lock in a favorable mortgage rate was usually on offer.
We highlighted this cycling pattern last week. We observed that it has generally been a good idea to lock when mortgage rates pulled back. Events over the past week support our observation.
Mortgage rates have cycled mostly lower in July. Quotes on mortgage rates two weeks ago were as low as they have been in two months. In hindsight, they were good rates to lock down. Rates moved higher last week. The move wasn’t dramatic, but it was still annoying. We’re talking an increase that would cost many borrowers $10-to-$20 more a month.
The yield on the 10-year U.S. Treasury note recently spiked 10-basis-points higher. The good news is the yield has flattened, which could lead to a rollover. As the yield on the 10-year note goes, so too go mortgage rates. Anyone who missed the opportunity to lock a couple weeks ago could see another opportunity soon.