– February 22, 2017
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Sales of existing homes rose 3.3 percent to a seasonally adjusted annual rate of 5.69 million sales in January. There were gains in three of the four regions in the country: Sales in the Northeast rose 5.3 percent, the South increased 3.6 percent, and the West jumped 6.6 percent.

The inventory of existing homes for sale at the end of January rose 2.4 percent from the end of December. That gain helped keep the month’s supply, the ratio of inventory-to-current-selling rate, close to an all-time low of 3.6 months, matching the low during the housing bubble of the early 2000s.

A month’s supply that low signals a very tight market for existing homes and is a key driver of rising home prices. According to the Standard & Poors Case-Shiller Home Price Index, home prices have risen 5.6 percent over the past year. Home-price increases tend to follow the month’s supply ratio with about a four-month lag.

Solid jobs growth, a tight labor market, and relatively high consumer confidence all suggest support for home demand and further home-price increases.  The key risk for housing comes from the combination of rising home prices and rising interest rates.  As the Federal Reserve raises short-term rates and strong economic activity pushes longer-term rates higher, housing affordability is likely to fall a bit despite rising incomes. The latest data from the National Association of Realtors put home affordability at a relatively high level by historical measures but, on the margin, rising home prices and rising interest rates will likely reduce affordability. Still, the tight market for existing homes suggests more price increases in the months ahead.

 

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Robert Hughes

listpg_hughes Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
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