The U.S. housing market seems to be defying gravity. Unemployment remains extraordinarily high to the extent that another round of expanded pandemic supplement benefits is working its way through congress. The economy is lackluster at best with the possibility of working its way into a depression.
And still… existing home sales increased 20.7% in June, the largest one-month jump since 1968. But… the rate of sales is still down 11.1% compared to a year ago. So, what we are seeing is a huge rebound after sales declined by 17.8% in April (month to month). The contrast shows a stark difference as the economy reopens after the shutdown and as Americans adjust to life in the age of COVID-19.
New home sales were also up 13.8% for June. That’s the highest since 2007, immediately before the mortgage meltdown that ushered in the Great Recession. Many of the new home sales were for homes that are still under construction. That’s important because new home construction was at a standstill for a couple of months during the nation-wide shutdown. The result is a significant drop in new home inventory that currently stands at about a 4.7-month supply compared to a 5.6-month supply in May. As we know, new home construction has struggled to keep up with the demand for several years. The jump in sales to 13.8% in June is up 7% year over year. The huge jump in sales combined with the decline in inventory indicates that the pace of new home sales is not sustainable, at least not in the short term.
With the strong June sales numbers in mind, also be aware that the initial outbreak of COVID-19 caused almost a three-month decline in home sales. We all know that we are in uncharted water. The resurgent viral outbreak is undeniable although how long it will last is yet to be determined. At this point in time, it’s probably wise to overlay the home sales’ trend line with the virus trend line. One thing that is notable with the surge in home sales is that it was strongest in the Northeast, Midwest, and West. The numbers in the South were less impressive (where the outbreak is most severe).
We know there has been a strong demand for homeownership, especially for first-time buyers. Year to year mortgage applications were also up 19% during June. But with mortgage rates hovering close to 3% or lower for the most qualified borrowers, many of the applications were for refinancing. Refinancing has been strong for a long time. Newly refinanced existing homes are not going to come on the sale’s market any time soon (property listings dropped 18.2% from a year ago). What we have is a limited inventory of existing homes, a reduced inventory of new homes, and the uncertainty of the virus spread. But on the upside are historically low-interest rates that look to continue indefinitely.
The limited supply is also forcing prices up just when many Americans are struggling with financial uncertainty because of the recession. But prices are already at a height that is causing affordability problems. It may surprise some people that the median home sales price decreased 1.7% in 2019 (although the change varied greatly from region to region). And yet, the combination of high demand and falling mortgage rates has helped fuel a 3.5% rise in the median price of existing homes so far in 2020. We also have mortgage moratoriums that will have to expire at some point in time. You could be expecting a surge of foreclosures to result. But it is likely to be a small number. About 75% of the at-risk mortgages are backed by Fannie Mae or another government entity. Some type of workout program will probably be created to prevent massive foreclosures.
The residential market has many forces acting on it. Any of which could take a dominating lead at any time. The current state indicates that demand for homes will remain high, inventory will remain limited, and prices will edge upward with affordability keeping prices from spiking while low-interest rates keep buyers in the market for an affordable mortgage. No significant increase in sales volume can be expected and prices should increase modestly at best. These are interesting times for the supply-demand curve.
Please comment with your thoughts about today’s residential real estate market during COVID-19. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].