December Existing Home Sales and November Home Prices

KEY DATA: Sales: -3.6%; Annual: +1.1%; Median Prices (Over-Year): +5.8%; FHFA Prices (Over-Year): +6.5%

IN A NUTSHELL: “Sales of existing homes continue to lag, but that may be due to the incredibly low level of supply.”

WHAT IT MEANS: The housing market is in good shape, especially if you are a seller. Yes, according to the National Association of Realtors, existing home sales fell in December and for all of 2017, the gain was modest. But the sales number is misleading, at least to an extent. The inventory of homes for sale is extraordinarily low. Also, the months supply, which is the number of months at the given sales place needed to clear the market, dropped to its lowest level since 1999, when the number was created. If you cannot find the home you want, you don’t buy a home and with few houses on the market, that is the case for many buyers. With demand outstripping supply, prices rose solidly over the year. Regionally, every part of the nation posted a decline in December. For all of 2017, compared to 2016, sales were flat in the Northeast and Midwest and were up modestly in the South and West.

The Federal Housing Finance Agency’s index of home prices rose again in November, though the gain was limited. Home prices in the West continue to surge but are not rising very quickly on the East Coast. Over the year, housing costs are up significantly. Indeed, nationally, home prices have increased at an average pace of 6.2% for the past six years.

MARKETS AND FED POLICY IMPLICATIONS: With baby-boomers retiring and Millennials entering the home buying years, you would think that housing sales would be growing more rapidly. But demand is going unmet because households are just not moving and putting their houses up for sale. Equity values in many parts of the nation have climbed above their housing-bubble peaks, so it is hard to blame under-water properties for the lack of inventory. What will induce people to sell is unclear and that raises some concerns. To the extent that housing costs are reflected in consumer inflation, the rapidly rising home prices will continue to drive the consumer price indices up faster. Indeed, shelter is one of the fastest growing segments of the Consumer Price Index. That gets piled on top of the rise in energy costs, which is likely to continue given that growth should be strong this year. And if Treasury Secretary Mnuchin’s hopes come true and the dollar weakens, we could see import prices rise faster. Jerome Powell has been confirmed as the next Fed Chair and while he doesn’t face the difficult issues his last two predecessors confronted, it doesn’t mean he comes in with no potential problems on the horizon. Expansionary fiscal policy in a time of solid growth and low unemployment has not been tried. Add that to building underlying inflationary pressures and the new Fed Chair’s job might turn out to be a lot more daunting than people currently think. I am sure Mr. Powell hoped to be Chair. Well, he got it. I wish him luck. He will need it.