Tight Inventories, Rising Prices Hurt Home Sales

Existing U.S. Home Sales Rise to Second-Highest Since 2007
Daniel Acker/Bloomberg via Getty Images

By Lucia Mutikani

WASHINGTON -- Home resales fell in October as a persistent shortage of properties limited choice for potential buyers and pushed up prices, suggesting some softening in the pace of the housing market recovery after strong gains early this year.

Still, housing remains on solid footing, with sales for the full year on track to be the best in eight years. That should see housing take up some of the slack from a chronically weak manufacturing sector.

%VIRTUAL-pullquote-The housing market is in decent shape but could be a lot better if people decided they were ready to move and listed their homes.%"The housing market is in decent shape but could be a lot better if people decided they were ready to move and listed their homes," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The National Association of Realtors said Monday existing home sales declined 3.4 percent to an annual rate of 5.36 million units. September's sales pace was unrevised at 5.55 million units and was the second highest since 2007.

The drop in sales was expected after contracts to purchase previously owned homes fell for two straight months. But with a tightening labor market, marked by a 5 percent unemployment rate, housing fundamentals are fairly healthy.

In addition, the government has taken steps to ease lending standards for young adults. However, an anticipated interest rate hike next month by the Federal Reserve could make housing a bit expensive, especially if there is no significant pick-up in wage growth.

"There is every reason to expect that the demand for homes will grind higher in the coming months. While interest rates are set to rise, so are incomes, and that will keep housing affordability historically favorable," said Matthew Pointon, property economist at Capital Economics in New York.

The weak sales come on the heels of reports last week showing a drop in housing starts in October and a decline in confidence among homebuilders. Economists had forecast sales falling to a rate of 5.4 million units last month.

The dollar rose to an eight-month high against a basket of currencies, while prices for U.S. government debt were up marginally. The housing index rose 0.3 percent as the shortage of houses for sale was seen boosting homebuilders such as D.R. Horton (DRI) and Lennar (LEN).

A separate report showed Markit's Purchasing Managers Index hit a 25-month low in early November, highlighting continued weakness in the factory sector. The decline, however, brought the PMI in line with the Institute for Supply Management survey, which has a longer history of tracking the manufacturing sector.

Pain in the West

October home sales were up 3.9 percent from a year ago and held above their average for the year. Sales dropped 8.7 percent in the West from the prior month and fell 3.2 percent in the South. These two regions, which are experiencing strong population growth, have seen large price increases due to tight inventory.

The supply squeeze is mostly hurting the lower end of the market, where sales have dropped sharply from a year ago.

%VIRTUAL-WSSCourseInline-750%Last month, the number of unsold homes on the market fell 2.3 percent from September to 2.14 million units. Supply was down 4.5 percent from a year ago, a worrying sign as housing heads into a quiet season, the NAR said.

At October's sales pace, it would take 4.8 months to clear the stock of houses on the market, up from 4.7 months in September. A six-months supply is viewed as a healthy balance between supply and demand.

With inventories tight, the median house price increased 5.8 percent from a year ago to $219,600. October's price increase marked the 44th straight month of year-on-year gains.

Although higher prices could sideline potential buyers, especially those wanting to purchase a home for the first time, they are boosting equity for homeowners, which could encourage them to put their homes on the market.

Realtors and economists say insufficient equity has contributed to the tight housing inventories. Last month, the share of first-time buyers crept up from September to almost a third. But the share was still the second lowest since 1981 on an annual basis.

"First-time home buyers continue to be crowded out by competition from investor sales. Price pressures from low inventory present another headwind to first-time buyers," said Derek Lindsey, an economist at BNP Paribas in New York.