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Housing slips as market tightens

Michael J. Berens

Thursday, May 31, 2018

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Housing slips as market tightens

A strengthening economy and steady employment figures were not enough to combat market pressures in April in the housing industry. Indicators for both home sales and home construction dropped, following positive gains in March.

Despite high demand, low inventories, high prices and rising interest rates are making it difficult for many would-be buyers to find a desirable, affordable home.

In normal times, conditions would appear to favor the housing market. As builders and realtors both point out, the economy and job market are healthy, incomes have started to creep up, and demographic trends suggest we should be seeing a turnover in housing as baby boomers retire and millennials marry and start families.

Fannie Mae reports its Home Purchase Sentiment Index hit a record high in April (91.7), with consumer confidence strong and more homeowners saying now is a good time buy.

But these are not normal times. While acknowledging it’s now a sellers’ market, most homeowners have no intention of selling, creating one of the worst shortages of existing homes for sale in decades and escalating prices even higher.

Accordingly, the portion of prospective buyers in the Fannie Mae survey who said now is a good time to purchase a home fell by three points from April.

The tight inventory of existing homes has driven more buyers toward the purchase of a new home. But labor shortages and rising costs of materials have dampened the pace of new construction and pushed prices out of the reach of many first-time buyers.

These countervailing forces took their toll on the industry in April. After overcoming several months of negative growth in March, sales of new homes (in number of units) declined again in April, by 1.5 percent. (Nonetheless, total sales are up 11.6 percent from the previous year, largely due to strong activity last fall.)

Similarly, following two months of positive growth, sales of all existing homes slid by 2.5 percent, and are now down 1.5 percent from the same time last year. Sales of existing single-family homes dropped 3 percent.

At the same time, the pace of new construction slowed, falling 3.7 percent (in number of units) in April, from a 1.9 percent increase in March.

Most of that decline was in the multifamily sector. Growth in single-family construction was more or less flat for the month. Permit requests also were down, again in the multifamily sector. Single-family permits nudged up slightly (0.9 percent).

By dollar value, total residential construction in April tumbled 13 percent from the previous month, according to Dodge Data & Analytics. Multifamily projects dove 20 percent, while single-family construction was down by just 4.0 percent.

Year-over-year, however, residential construction was up 3 percent. (Because it is based on the value of new projects, Dodge’s data can be quite volatile from month-to-month.)

At present, market conditions show little sign of improving. The National Association of Home Builders states its Housing Market Index, which measures builder confidence, gained two points, to 70, at the start of May, with builders encouraged by rising demand for new single-family homes.

Yet, at the same time, builders are challenged to keep pace with demand and to hold costs to a level affordable for many prospective buyers.

Rising interest rates and the increasing cost of consumer goods, as well as higher home prices, are likely to deter most homeowners from putting their homes on the market. Altogether, these headwinds likely will retard home sales this spring.

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