May existing-home sales continued a 13-month slide in year-over-year results. This is despite a nearly 50-basis point decline in the benchmark 30-year mortgage rate to rates that are once again below 4 percent, a modest increase in inventory levels and moderation of rising prices for both new and existing homes. Lastly, this is in the face of the lowest unemployment rates of several generations among virtually every demographic group in the nation.
Tell Me Why?
So, what gives? For the past 40 years, when any of these factors pointed the same direction as they are now, housing sales would take off. Now, with every factor in favor of housing, we see month- over-month declines in existing home sales and flatness in the new home sales segment. Here are some thoughts.
New, single-family home construction has not recovered to anywhere near its record highs in the 2004-2005 period. They are barely above one-half of that level. They are at a lower level than almost any year in the past 30 years.
Boomers are at the stage where they desire to downsize, but there’s little inventory available to allow them to do so at an affordable price. So, many are sitting on their homes until opportunities come along.
Millennials and Gen Z want entry-level housing to begin their journey to a life of homeownership, but there’s little inventory available. Plus, this is also the market where investors and Boomers are looking for housing. This fierce competition is driving up the cost of homes in this segment well above the per-square-foot price of larger homes in many neighborhoods.
The mood of many communities, towns, counties, and even some states has turned bearish against home building and growth due to crowded streets, parks, and other amenities. Recently, a major suburb of Denver passed legislation limiting new home construction to no more than 1 percent of the existing stock of homes. A recent report in The Wall Street Journal pointed out that in many east and west coast cities, the level of new home construction is at record lows as well—just as employment and new household formation are reaching record levels in those same locations.
The Bottom Line
The bottom line is that unless (and until) government reduces the cost and complexity of new-home construction, which would ease the many bottlenecks blocking such construction, there’s little way the housing market will change from its current condition. That is unless you think a significant recession in the general economy will help.