November 16th, 2016
Statistics have been poked fun at by philosophers, authors and even statisticians themselves. Mark Twain famously wrote, "Facts are stubborn, but statistics are more pliable" - in other words, a statistic can be used to express multiple stories based on the teller and what they are trying to tell (or, often, sell). But let's consider the economic and housing-related numbers from the last few months or so - when you put them together, they tell a complementary story that is difficult to wave off as another data-driven "tall tale."
While single-family home sales rose in July to their highest level in nine years, existing home sales maintained their unenviable streak of 14 straight months of declines.1 From industry analysts to the NAR, the finger is squarely pointed at tightening inventory - currently 5.8 percent lower than last year at this time2 - which is supporting another factor holding back sales: The rise in the median existing-home price that in July sported its 53rd consecutive month of year-over-year gains.3
On the other side of the coin, the existing-home shortage has been a boon for new home sales, which jumped to their nine-year high and were up 31.3 percent since the same time last year.4 Meanwhile, permits for construction of single-family homes zoomed up by 3.7%.5 As for the people building those homes, the National Association of Home Builders/Wells Fargo builder sentiment index rose two points to 60 - anything above 50 indicates that builders have a positive impression of their business prospects.6 Svenja Gudell, chief economist at Zillow noted that builders are paying attention to the less-expensive end of the market to help meet the demand of first-time homebuyers and those buying on a budget - at one time, the purview of the existing-home market.7
Unfortunately, new homes, for all of the positive news, face the same inventory drag as existing homes - just as homeowners aren't parting with their houses fast enough to meet the demand, homes, like Rome, aren't built in a day.
Here is where the "statistical interpretation" we discussed at the beginning comes into play. New homes take time to be built, which is holding back their potentially explosive growth. What, though, is keeping existing homes from coming to market? An interesting statistic comes from Metrostudy, the sister company to REMODELING, a monthly remodeling industry magazine: The former's Residential Remodeling Index, which measures economic reports that influence remodeling activity, rose for its 17th consecutive quarter, year over year.8
Metrostudy's chief economist, Mark Boud, sees the data two ways: on the one hand, people are fixing up their homes to sell; on the other, they are fixing up their homes to stay. For those who can afford to move, they are adding value to their homes to improve their return. However, for every person repairing and preparing to put their house on the market, there are more who are looking at their homes, the lack of inventory and rising prices and thinking, "Why don't I use my money to update this house?" This is especially true for people whose financial picture has improved and can now do the remodeling projects they had put off when money was tight. As Mr. Boud noted, "We are expecting a steady expansion for the remodeling market over the next few years, as the trend of investing in current homes increases, especially once mortgage rates lift-off from current lows."9
In the meantime, mortgage rates remain favorable, which means that even with low inventory and rising prices homeownership still remains within reach of buyers who are ready and willing to purchase. Those buyers should be prepared for the house hunting experience that this environment presents, like knowing what they can and can't live without in a home, being ready to expand their search area and understanding their finances well enough to know when to "fold" in a bidding war.
They should also be armed with a loan preapproval so that they can put their best foot forward to a seller and be ready to make an offer when the right opportunity comes along.
National Association of Realtors, 2016.