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Residential Real Estate and Home Sales: A Tale of Two Markets?

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May 13, 2016
Residential real estate: home sales and mortgage rates

Residential real estate sales seem to be at first blush a tale of two markets.

In data released in March, the Census Bureau said new single-family home sales rose 3.5% in February, with housing starts up 5.2%. However, existing home sales fell 7.1%, according to the National Association of Realtors.

The deeper story shows that the residential real estate market is coming off one of its strongest sales years in 2015, and the laws of supply and demand may be sapping the strength of existing home sales.

In 2015, new home sales totaled 501,000 according to the Census Bureau, a 14.5% jump from 2014. Existing home sales also saw a strong 2015, the National Association of Realtors said, with last year’s sales up 7.7% versus 2014.

Home Prices and Sales

The sales come on the heels of rising home prices nationwide, according to the S&P/Case-Shiller 20-City Composite Home Price Index (see figure 1).

Home prices trending higher

FIGURE 1: HOME PRICES TRENDING HIGHER.

This chart displays average home prices in 20 U.S. cities from 1998 to 2016. Average home prices across the U.S. have been trending higher over the last several years. Chart source: research.stlouisfed.org. Data source: S&P Dow Jones Indices LLC. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Since bottoming out in 2010 after the financial crisis, new single-family home sales essentially rose (see figure 2) and are coming close to their April 2008 levels, with a supply of 5.6 months at the current sales rate. 

New home sales

FIGURE 2: NEW HOUSES SOLD.

This chart displays the number of new houses sold (in thousands) from 1963 to 2016. The number of new houses sold has been trending higher since the financial crisis. Chart source: research.stlouisfed.org. Data source: U.S. Bureau of the Census. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Existing home sales, defined as completed transactions that include single-family homes, townhomes, condominiums, and co-ops, show sales dropped sharply to 5.08 million units in February versus January (see figure 3). However, sales remain above February 2015’s sales of 4.97 million. 

Existing home sales

FIGURE 3: EXISTING HOMES SOLD.

This chart displays the number of existing homes sold, 2013 to 2016. The number of existing homes sold dropped sharply in February. Chart source: research.stlouisfed.org. Data source: National Association of Realtors. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Additionally, existing home supply is down, which may be a reason behind weaker sales, said Lawrence Yun, chief economist for the National Association of Realtors.

"The lull in contract signings in January from the large East Coast blizzard, along with the slump in the stock market, may have played a role in February's lack of closings. However, the main issue continues to be a supply and affordability problem. Finding the right property at an affordable price is burdening many potential buyers," Yun said in a press release.

Consumer Confidence and Jobs

Gains in consumer confidence, stronger home values, stronger job growth, and concerns the Federal Reserve would start tightening interest rates may have been behind the surge in sales in 2015. Consumer confidence remains strong, and so does job growth. And despite the Fed raising rates in December, mortgage rates for conventional 30-year and 15-year mortgages remain historically low (see figure 4).

30-year conventional mortgage rates

FIGURE 4: 30-YEAR CONVENTIONAL MORTGAGE RATE.

This chart displays the average interest rate associated with a 30-year conventional mortgage since 1971. The long-term trend is down. Chart source: research.stlouisfed.org. Data source: Board of Governors of the Federal Reserve System. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Although the real estate market doesn’t grab the headlines it once did during the financial crisis, it’s still important to the U.S. economy.

Because existing home sales are far greater than new single-family home sales, it will be important to watch whether February’s drop in sales was a one-month fluke or a sign that tight supply and rising home values will diminish the strength in housing. Yun said in December not to expect a repeat of 2015’s torrid pace. In addition to tight supplies and rising interest rates, home sales in areas of the U.S. that depend on petroleum production, such as Texas and North Dakota, could see a fall.

That was evident in February’s data. Existing sales across the country fell versus last month, but versus last year, sales were up in the Northeast, South, and West. Midwestern sales were flat versus a year ago.

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