May existing home sales show prices stabilizing, inventory continuing to increase towards its historical range

 

 - by New Deal democrat

The first part of this week is all about more housing data. This morning started out with  existing home sales, which although they typically constitute about 90% of all sales are the least important for forecasting purposes, since the main thing that happens is only a change in ownership, and therefore they have much less economic impact than new home sales.

And this month the level of sales themselves was far less important than what the median price for an existing home and inventory are telling us about the ongoing rebalancing of the housing market.

Sales of existing homes, just like new homes, have been rangebound for the past 2 years, in reaction to mortgage rates remaining in the 6%-7% range. In May they remained within that range, increasing 0.8% to 4.03 million annualized on a seasonally adjusted basis (although on a YoY basis there was a slight -0.7% decline). The below graph shows the last 10 years, showing both the immediate post-COVID surge and the low but rangebound trend since:

But as I wrote above, prices and inventory were more important this month. 

Let’s start with inventory. As I have pointed out repeatedly, the secular decline in inventory began well before onset of the pandemic, reaching a nadir in 2022. Unlike sales, this series is not seasonally adjusted, so it must be looked at YoY, and in May inventory continued to climb, to 1.540 million units, a 20.3% YoY increase, and only 1,000 units lower than May 2020 (May data not shown):

Nevertheless inventory is still below its pre-2014 levels, which typically were in the 1.7 million to 1.9 million range, which means that although it is lessening the chronic shortage still exists.

Finally, let’s look at prices. Builders of new homes are much more able to respond to market pressures, and - leaving the effects of tariffs on building materials aside - this has continued to make new homes relatively much more attractive than the constricted existing homes market, which has had strong upward pricing pressures right through the end of last year.

There was already strong evidence that this upward pricing pressure was abating. And this month added yet more such evidence. Like inventory, this data is not seasonally adjusted and so must be looked at YoY, as in the graph below of the last 10 years (May data not shown):

In the immediate aftermath of the pandemic in 2021-22, prices increased as much as 15% or more YoY. After the Fed started its sharp hiking regimen, prices briefly turned negative YoY in early 2023, with a YoY low of -3.0% in May of that year. Thereafter comparisons accelerated almost relentlessly to a YoY peak of 5.8% in May of 2024, before decelerating to 2.9% in September.

Here are the comparisons since:

October 4.0%

November 4.7%

December 6.0%

January 4.8%

February 3.6%

March 2.7%

April 1.8%

In May this deceleration continued, with a YoY% gain of 1.3%, the lowest such gain since earnly 2023.

In summary, this month’s existing home sales report tells us that the rebalancing of the housing market is continuing. Although seasonally adjusted sales remain rangebound, price increases have abated dramatically, and inventory is increasing at a big YoY clip. Although inventory is still low by historical standards, it is possible that by July’s report it could reach the 1.7 million level, i.e. the bottom of its pre-2014 historical range.