Higher home prices risk closing door on housing momentum

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Signs are mounting that rising home values are starting to close the door for more Americans, threatening to temper the momentum in residential real estate.

Purchases of previously owned houses unexpectedly fell in July to an 11-month low and sales of new homes were the weakest this year, reports showed this week. While the median time on the market for existing properties was 30 days in July compared with 36 days a year ago, indicating resilient demand, the number of listings remains lean and problematic.

Limited inventory has been a nagging theme for the housing market and is the primary reason why home prices continue to climb and outpace wage growth. While borrowing costs remain low by historical standards, affordability is its weakest of the expansion. The number of Americans who view home-purchase conditions as “good” has fallen to a six-year low, according to the University of Michigan’s latest consumer sentiment survey. To be sure, more still say the buying environment is “good” than “bad.” It’s just not getting better.

The S&P CoreLogic Case-Shiller nationwide home-price index stood at a record in May, the latest data available, while the cost of a previously owned home in June also stood at an all-time high. The result: The share of consumers in the latest University of Michigan survey who said home-buying conditions were bad because of soaring prices reached an 11-year high this month.

Home-price growth has been consistently outpacing wage growth, Lawrence Yun, chief economist at the National Association of Realtors, said at a press briefing accompanying the release of the July existing-home sales report.

“That clearly impacts affordability,” he said. While the low interest-rate environment is helping, “there’s a continuing misalignment between home-price growth and people’s income or wage growth. At some point, it’ll potentially choke off buyers.”

The July home sales figures already show housing demand is settling back after climbing to multiyear highs at the end of the first quarter. An index of mortgage applications for home purchases was down 4% in the four weeks ended Aug. 18 and off 12% from a seasonal peak in June, according to the Mortgage Bankers Association. The gauge itself is at a six-month low.

At the same time, it may be too early to judge the recent data points as more than a pause in the early-year momentum that saw sales reach a decade high. Matthew Pointon, a property economist at Capital Economics, sees demand holding up.

“Rather than worsening affordability, it is primarily the lack of inventory which is holding back sales and putting households off from applying for a mortgage,” he wrote in research note. “That is a situation which is set to continue for the remainder of the year.”

Stephen Stanley, chief economist at Amherst Pierpont Securities, writes that demand is outstripping supply and “starting to push some potential buyers to the sidelines.” That’s why housing starts data will be key over the next few months. After all, an introduction of more inventory would go a long way in helping alleviate price pressures and ease affordability constraints.

Bloomberg News