Home Sales Data: A Major Sign for the Financial Services Industry & Economy?

July 6th, 2017

As we all know, the housing market bubble and ensuing crash was one of the significant contributors to the Great Recession. The housing market initially took a major hit but has slowly recovered over the past eight years or so. On June 21, the NAR released data on existing homes sales, which account for about 90% of home sales, in the U.S. for the month of May. According to the NAR, existing U.S. housing sales increased 1.1% in May to a seasonally adjusted annual rate (SAAR) of 5.62 million homes, as shown in Figure 1, accompanied by a 3.2% increase in median sales price to $252,800, illustrated in Figure 2. All regions of the U.S. experienced growth in sales except for the Midwest, where sales declined by 5.9%. The Northeast saw the largest percentage growth in sales, with a 6.8% increase in sales since April. Overall, these data provide us with a better understanding of the economy, specifically with regard to distinct regions, and may suggest certain economic trends, such as consumer expenditure growth. This may prove to be beneficial for the ARM industry, especially for firms servicing the financial services market, assuming the current trend continues.

This price increase is driven by the greater demand for existing homes, relative to an inventory shortage. Housing inventory has dropped for 24 consecutive months and is currently down 8.4% year-over-year. This can be attributed to, but is certainly not limited to, rising mortgage interest rates (which increased from 3.67% to 4.01% between May 2015 and May 2017) and a 5.5% decline in new home construction to a SAAR of 1.09 million units. With the Federal Reserve increasing interest rates yet again in June, and indicating that it should raise its benchmark rate at least once more this year, home-buyers may become more concerned about the costs associated with increased mortgage rates, which could potentially stifle overall consumption and debt accumulation.

May’s median sale price of $252,800 is no small number. That is up 5.8% year-over-year and increases both the down payment and mortgage payments for prospective homeowners. While unemployment is at a historical low of 4.3%, median salaries for U.S. workers have barely increased. In fact, the housing shortage has caused prices to increase at more than double the pace of household wages year-over-year in 2017. Although housing demand is increasing and supported by a tight labor market, most of the price increase is due to the supply shortage around the country. A similar trend can be seen in the U.S. Census Bureau’s Monthly New Residential Sales for May 2017. New homes sales, which, as we alluded to previously, account for approximately 10% of total home sales, experienced a seasonally-adjusted 2.9% increase in homes sold from April. Additionally, new home sales experienced an 11.5% increase in median house prices compared to April, and a 16.8% growth compared to May 2016.

Currently, the housing market is stable and growing, but is also constricted by inventory shortages. Unless the construction of new homes ramps up in the near future and matches pace with the increase in demand, inventories will continue to fall and prices will continue to grow – which may create another bubble if mortgage aren’t lent out responsibly.

As shown in Figure 3 above, mortgage debt outstanding for one- to four-family residences is up 2.7% from a year ago and is trending upward. This growth is driven primarily by continual population growth, higher prices, as shown previously, a healthier economy, and greater consumer confidence. Because mortgages account for nearly 58% of the total debt market and about 67.4% of total consumer debt, this trend may lead to greater opportunities for the ARM industry since it suggests that consumers are more willing to take on massive loans that may lead to an over leveraging of their finances in the future and eventual delinquencies. However, if this trend stagnates or reverses course, the ARM industry – and economy as a whole – may have other things to worry about.

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