Why did home sales drop in December?
Sales of existing homes fell in December amid historically low supplies and rising prices and mortgage rates but still closed out the best year in a decade.
Sales decreased 2.8% to a seasonally adjusted annual rate of 5.49 million from an upwardly revised 5.65 million in November, the National Association of Realtors said Tuesday. Economists expected a 1.8% drop to 5.51 million.
The decline, however, came after three straight increases and a solid overall performance in 2016. A total 5.45 million existing homes were sold last year, up from 5.25 million in 2015 and the highest level since 2006.
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“Solid job creation throughout 2016 and exceptionally low mortgage rates translated into a good year for the housing market,” said Lawrence Yun, chief economist of the realtors group. “However, higher mortgage rates and home prices combined with record low inventory levels stunted sales in much of the country in December.”
In December, single-family home sales fell 1.8% while condominium and co-op sales slid 10.3%. Regionally, sales declined 6.2% in the Northeast, 4.8% in the West and 3.8% Midwest. Sales in the South were unchanged.
Low supplies hurt sales
Housing supplies in late December tumbled 10.8% to 1.65 million, the lowest on records dating to 1999. Inventories have dropped for 19 straight months and amount to a 3.6 month supply, down from the six months considered balanced. Yun blamed inadequate home construction. “More needs to be done to address the regulatory and cost burdens preventing builders from ramping up production,” he said.
Skimpy inventory is expected to continue to act as a headwind in coming months, said economist Kristin Reynolds of IHS Markit. After the housing crash, many homeowners owed more on their mortgages than their homes were worth, though the share has fallen to about 10% from 29% in 2012. Still, some Americans are waiting to realize bigger equity gains before putting their homes up for sale, said Ralph McLaughlin, chief economist of real estate research firm Trulia.
Yet the crunch is likely to ease later this year. Reynolds notes homebuilder sentiment is strong, heralding more home construction that will provide current homeowners more choices. As they move, that should ease the bottleneck for first-time buyers. And McLaughlin said higher home values will coax more investors to sell units that are currently renting out.
Affordability still a challenge
That should help moderate housing prices. The median home price was $232,200 in December, up 4% over the past year as the limited supplies and solid demand allowed homeowners to reap bigger gains.
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Also, 30-year mortgages averaged 4.2% in December, up from 3.77% in November and the highest rate since April 2014. The average rate rose from 3.47% in late October to 4.32% in late December, but has fallen three straight weeks to 4.09%. Rates generally are expected to climb this year on anticipation of stronger inflation, fueled partly by President Trump’s fiscal stimulus plan and Federal Reserve rate hikes.
Meanwhile, the median home price was $232,200 in December, up 4% over the past year.
Rising prices and mortgage rates are discouraging first-time homebuyers in particular, who represented 32% of all sales last month, in line with their share for all 2016 and below the historical average 40% that tends to underpin growth.
“It’ll take more entry-level supply, continued job gains and even stronger wage growth for first timers to make up a greater share of the market,” Yun said. Annual wage gains hit 2.9% last month, a 7½-year high, are projected to continue climbing this year a tight labor market.