Affordability Squeeze Depresses Home Sales

Prospective homebuyers are confronting what the National Association of Realtors (NAR) describes as “the most difficult affordability conditions in nearly 40 years.”

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When will the Federal Reserve raise interest rates? Analysts, business executives and consumers have been asking that question with increasing intensity for the past two years. The July employment report may have brought the Fed closer to answering it.

Employers added 215,000 jobs for the month, a little short of the consensus forecast, but still above the 200,000 level the market has averaged consistently this year. The unemployment rate remained at a seven-year low (5.3 percent) and the strong job gains reported previously for May and June were both revised upward.

Wage gains remain anemic, however. Hourly earnings rose only five cents (0.2 percent) in July and are up only 2.1 percent for the year, barely keeping pace with inflation. Still most analysts agreed that the overall July employment report was strong enough, and underlying economic trends are positive enough, to deflect concerns that an interest rate move now would be premature, paving the way for the Fed to act this year.

The July report “doesn’t move the Fed any faster, but it doesn’t hurt their cause,” J. Kinahan, chief market strategist at TD Ameritrade,” told

Clearing a Hurdle

“We view this report as easily clearing the hurdle needed to keep the Fed on track for a September rate hike,” Rob Martin, an economist at Barclays-New York, agreed. “The bar for not moving now is much higher,” he told Reuters.

Some economic indicators expanded the comfort zone around a rate move. The economy, measured by GDP, increased by 2.3 percent in the first quarter, and revisions produced a 0.6 percent gain for the first quarter, as well, instead of the decline reported initially.

But other indicators were less reassuring:

  • Business spending declined by 0.6 percent in the second quarter to the lowest level since the third quarter of 2012;
  • Construction spending in June posted its smallest monthly gain (0.1 percent) since January; and
  • Consumer confidence stumbled badly. The Conference Board’s confidence index fell to 9.9 in July – its lowest level in four years.

While some dismissed the confidence reading as an aberration, others suggested that it might reflect more fundamental concerns about the economy generally and the employment outlook specifically. The percentage of respondents expecting job prospects to improve in the next 6 months fell to 13.1 percent from 17.2 percent in June, while the share expecting jobs to become harder to get increased to 20.2 percent from 15.2 percent.

Housing Indicators Mixed

Consumers seem to be feeling somewhat better about the housing market, based on responses to Fannie Mae’s June National Housing Survey. Although the number of respondents viewing this as a good time to buy declined, the number who see this as a good time to sell increased to 52 percent ― moving beyond the 50 percent mark for the first time in the survey’s history. The number predicting that rents will increase in the next 12 months increased by 4 percentage points to 59 percent.

These readings point to “a healthier housing market,” Doug Duncan, Fannie Mae’s chief economists, believes, “with more renters likely to find owning more cost-effective than renting and more sellers likely to put their homes on the market.”

The June housing reports provide some support for that upbeat assessment, and some reasons to doubt it.

Existing home sales jumped 3.2 percent compared with May and 9.6 percent year-over-year, leading one analyst to describe this segment of the market as “on fire.” Those flames haven’t spread to the new home sector, however, where sales in June fell to a 7-month low. Although sales were still 9.6 percent higher than the same month last year, some analysts found the decline disturbing.

“An Awful Recovery”

“New home sales remain at early 1991 levels,” Anthony Sanders, a real estate finance professor at George Mason University, pointed out. “This is an awful economic recovery,” he told National Mortgage Professional.

Tom Wind, executive vice president in charge of home lending at EverBank, was also concerned, but less discouraged. “You never want to see a data regression,” he noted in the same arable. “But we remain optimistic that we are still on a long-term upward trajectory.”

Housing starts did, in fact, increase in June, but most of the gain was in the multi-family sector; single-family starts declined by about 1 percent. Single-family permits, an indicator of future activity, increased by less than 1 percent for the month, but they were more than 26 percent above the year-ago level.

Home prices are still rising – just under 5 percent annually, according to the most recent Case-Shiller index reading. That is slower than earlier this year, but still “too fast” for Lawrence Yun, chief economist for the National Association of Realtors, who sees the low inventory of homes for sale as a primary driver of rising prices, ad a major source of concern.

“The market is tighter compared to last year,” he noted in a recent report. “We need more supply to bring the price growth down consistent with income growth.”

Stan Humphries, chief economist for Zillow, shares his concern. “Inventory is still very low and the housing market is still very much out of balance,” he notes in one of his recent reports, adding this caution: “Low inventory levels like those we’re seeing across the country can bring the home-buying process to a screeching halt.”