June existing home sales: a pause in the rebalancing of the housing market

 

 - by New Deal democrat



Housing data for June resumed this morning with existing home sales. 

Let me start with my usual caveat: 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.

The trend I have been looking for in the past several years is the rebalancing of the new and existing homes markets. Existing home inventory has been removed from the market for over 10 years (likely due in part to absentee rental owners buying increasing chunks of inventory), and really accelerated during the pandemic. This caused an acute shortage of houses for sale, which in turn led to bidding wars among buyers and a spike in prices.

A rebalancing of the market more than anything would require an increase in inventory at least to pre-COVID levels, and a deceleration of price increases, or even outright decreases. Which means that 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.

Let’s start with sales. In reaction to generally stable mortgage rates in the 6%-7% range, sales of existing homes, just like new homes, have been rangebound for the past 2+ years. In June they again remained within that range, decreasing -2.7% to 3.93 million annualized on a seasonally adjusted basis. On a YoY basis sales were exactly unchanged. The below graph shows the last 5 years, showing both the immediate post-COVID surge and the low but rangebound trend since:

But as I wrote above, prices and inventory continued to be more important this month. 

Let’s start with inventory. The secular decline in inventory reached a nadir in 2022. Unlike sales, this series is not seasonally adjusted, so it must be looked at YoY, and although it declined -1,000 on a month over month basis, in June inventory increased YoY by 15.9% to 1.530 million units, , and for the third month in a row only 1,000 units lower than the comparable month in 2020 (June data not shown in the graph below):

Pre-2020, inventory was typically 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.

In the past few months there has been strong evidence that this upward pricing pressure was abating. This month broke that trend, but only slightly.  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:

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%

May 1.3%

In June prices were higher by 2.0% YoY, as indicated slightly breaking the trend  in place since December.

To conclude, this month’s existing home sales report marked a pause although not a reversal in the rebalancing of the housing market. Seasonally adjusted sales remain rangebound, as did the YoY change in inventories, while YoY price increases firmed a little. 

Last month I concluded with “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.” This now appears very unlikely. This report will have to be weighed against the report for new home sales, which will be released tomorrow. Despite this month’s pause, I still expect moderation in price increases and more importantly, for inventories finally to exceed their 2020 levels.