Healthy existing home sales during January offered further evidence that the national economy is on solid footing despite concerns stemming from slow economic growth overseas and low energy prices at home. Strong wage growth, industrial production and retail sales also lent support that the world’s largest economy is positioned to weather contagion from a global downturn, though the pace of economic expansion could slow.
The results of January’s home sales data released by the National Association of Realtors and the Commerce Department offered mixed, but generally upbeat results. The NAR reported a 1 percent rise in single-family home sales from December to an annualized rate of 4.86 million. The median sales price surged 8.3 percent in the past 12 months as demand outstripped supply. New homes sales, meanwhile, plunged 9.2 percent to an annualized 492,000 units. The new-home sales report is notoriously volatile and January is outside of the primary buying season.
Beneath the surface, the NAR’s report failed to signal any significant shift in the housing market. The potential for rising interest rates later this year likely shifted some home sales forward, and some payback may be in order in the coming months. First-time homebuyers accounted for 32 percent of purchases in January, up from 30 percent during 2015. The participation of first-time buyers needs to be closer to 40 percent to put upward pressure on the on homeownership rate. The surge in prices will also give first-time buyers pause, a trend already evident in the west where home sales declined 4.9 percent from December and the median price has soared above $300,000.
New home sales faced the same pricing pressure in the west, where the pace of transactions declined 32 percent in January. Homebuilders remain focused on the upper tranches of the market, limiting the sector’s impact on supply and demand fundamentals. Although many homeowners that stayed the course during the housing downturn have recovered some equity, the increase has been insufficient to encourage them to upgrade to new, more expensive homes. As a result, the availability of entry-level properties remains low, limiting access to first-time buyers. Furthermore, strong rental demand and high rents are persuading homeowners that do upgrade to retain the old home as an investment property.
Overall, stronger home sales should help prevent the U.S. from slipping into a recession. The total housing market contributes approximately 15 percent to GDP and is not easily outsourced. However, the increase in sales is unlikely to have a significant impact on single-family investment homes in the near term. Wage growth, particularly on the West Coast, has come too late to tip the balance in favor of buyers, while shifting demographics will keep the balance of ownership and investment near current levels in this year.