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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Summer temps have been heating up but the employment market cooled slightly in June. Employers added 213,000 workers for the month, beating less optimistic expectation, but lagging May’s total of 244,000 – revised upward from the 223,000 reported initially.

A revision in the April data added another 16,000 workers to that month’s total. The unemployment rate ticked up to 4 percent from 3.8 percent, while wage gains held steady, with average hourly earnings rising five cents (0.2 percent) compared with a 0.3 percent increase in May.

Analysts attributed the higher unemployment rate to an increase in labor participation, as the strong economy lures more unemployed workers into the market. The consensus view also sees the wage gain, though still modest, as positive─ strong enough to put more money in workers’ pockets but not strong enough to ignite inflationary fears at the Fed, which boosted its target rate in June for the second time this year and has signaled that two more hikes are likely between now December.

Underscoring the Fed’s confidence in the economy, Fed Chairman Jerome Powell told reporters after the June Federal Open Market Committee meeting, “The decision you see today is another sign that the U.S. economy is in great shape. Most people who want to find jobs are finding them.”
Some simmering concerns shade what are generally viewed as upbeat economic reports, primary among them, the lack of qualified workers to fill available positions.

Worker Shortage

“That’s the number one issue” for Dan North, chief economist for Euler Hermes North America, a national credit insurance firm. “We’re desperate for labor,” he told Politico.

“Business’ number one problem is finding qualified workers,” Mark Zandi, chief economist at Moody’s Analytics Inc., agreed. “At the current pace of job growth, if sustained, this problem is set to get much worse,” he noted in a press statement, adding, “These labor shortages will only intensify across all industries and company sizes.”

Economists and business executives are also becoming increasingly concerned about the impact of the trade war ignited by President Donald Trump, which appears to be escalating as other countries announce tit-for-tat tariffs in response to those the U.S. has imposed on them.
The minutes of the June meeting of the Federal Open Market Committee (FOMC) indicated that Fed policy makers, though generally happy with economic conditions, share that concern. According to the minutes, committee members “noted that the uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects.”

Housing Challenges Persist

Turning to housing ─ the scant inventories, rising prices and higher interest rates that have impeded sales all year persist. The high- (or low)-lights:

- Existing home sales fell 0.4 percent in May compared with April – the second consecutive month-over-month decline, as the annual sales pace remains stuck below 5.7 million units. Scant listings, especially at the lower end of the market, pushed sales 3 percent below the year-ago level.

- The National Association of Realtors’ pending sales index also slipped again in May, falling by 0.5 percent compared with April and 2.2 percent below May of last year. A decline in mortgage applications suggests that the June report isn’t likely to be much better.

- On a somewhat brighter note, inventory levels actually improved a bit in May, increasing by 2.8 percent. But the hole is deep. Inventories were still 6.1 percent below the year-ago level, extending to 36 the consecutive monthly near-over-year declines.

- New home sales increased by 7 percent in May compared with April, as the dearth of existing home listings pushed more buyer into the new home market. Sales for the month beat the year-ago total by more than 14 percent.

- Housing starts also rebounded in May after plummeting in April, increasing by 5 percent to a seasonally adjusted rate of 1,350,000 units—more than 20 percent above the May 2017 level. Single family starts are up 9.8 percent for the year-to-date. Single-family permits, however, declined by 2.2 percent, although the total topped the year-ago report by 7.7 percent.

- After reversing a three-month slide in April, builder confidence, measured by a National Association of Home Builders index, slipped again in May, as growing concern about tariff-induced increases in building materials offset optimism about increasing demand for homes. "Builders are optimistic about housing market conditions as consumer demand continues to grow," NAHB Chairman Randy Noel said in a press statement. But builders, he noted, “are becoming increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017," Noel noted.

- Home prices increased by 6.9 percent in April compared to the same month last year – slightly below the March pace, but still increasing affordability concerns for many buyers. CoreLogic now describes more than half of the 50 largest housing markets as “overvalued.”

"The best antidote for rising home prices is additional supply," Frank Nothaft, chief economist for CoreLogic, said. But despite some recent improvement, he noted, “new construction has failed to keep up with and meet new housing growth or replace existing inventory.”