Housing Market is Faltering and Strong Economy Offers No Cure

POSTED: 10/19/18

Author: Laura Kusisto and Sharon Nunn

Publication: The Wall Street Journal

Prospective buyers arrive with a real-estate agent at a house for sale in Dunlap, Ill., in August. PHOTO: DANIEL ACKER/BLOOMBERG NEWS

The housing market is stumbling through its longest slump in four years, as the divergence between a booming U.S. economy and weakening home sales that many had dismissed as temporary now looks poised to continue.


A combination of rising mortgage rates and high home prices, a dearth of inventory and a new tax law that reduces incentives for homeownership have weighed on the housing sector this year.


Sales of previously owned U.S. homes fell 3.4% in September from the previous month to a seasonally adjusted annual rate of 5.15 million, the National Association of Realtors said Friday. Sales were down 4.1% from a year earlier, the seventh straight month of declines—marking the longest slump since 2014, when the market was still recovering from the housing crash.


“Without a doubt there is a clear shift in the market,” said Lawrence Yun, the group’s chief economist.


Mr. Yun blamed a dearth of inventory for weakening sales in recent months. But he also pointed to signs of strong demand, suggesting that could eventually pull the housing market out of the doldrums, if the home supply increased.


Still, even with rising inventory levels in September, Mr. Yun said fewer people were attending open houses. That shows demand could be faltering and that some potential buyers might be giving up, for now.


Economists said that rising home prices—up more than 50% nationwide since prices bottomed out in 2012—have been a drag on the housing market. More recently, mortgage rates have been shooting higher, roughly a percentage point this year to nearly 5%.


Workers’ wages are rising again, up nearly 3% over the past year, but not enough to keep up with years of rapid growth in home prices. The monthly payment to buy the average-priced home has risen 16% since the beginning of the year, according to mortgage-data firm Black Knight Inc.


Affordability is “already more stretched...than it has been in previous cycles,” said Aaron Terrazas, a senior economist at Zillow.


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Real-estate agents say power is shifting more toward buyers. They now have a number of homes to choose from within their budget and feel they need to weigh their options, knowing their home may not appreciate nearly as quickly in the coming years.


Buyers have also returned to putting contingencies on their purchases to protect themselves if the home has hidden physical flaws or doesn’t appraise at the purchase price—a practice that was often waived to make offers stand out during bidding wars when the market was hot.


“Home inspections are back,” said Joselin Malkhasian, a Realtor in Boston who added she has done more home inspections in the past month than in the past year.


When Phil Morris, a sales executive at Microsoft Corp., moved to Seattle from Oklahoma City last August, “this market was nuts,” he said. Mr. Morris, 50 years old, gave up on buying a home and decided to rent instead.


A few months ago, he noticed that the number of homes on the market was “going way up.” A 1950s house in West Seattle with three bedrooms and a big backyard in immaculate condition caught his eye. He ultimately bought it at a discount of more than $15,000 from the $605,000 asking price.


“That was 100% unheard of” last year, said Mr. Morris’s agent, Lindsey Gudger. Sellers have even begun to cover closing costs—a saving of $5,000 to $7,000 for many buyers—Mr. Gudger said, something that was also virtually nonexistent last year.


It is rare for the housing sector to slow so significantly even as the job market and stock market are booming. Gross domestic product grew at a 4.2% rate in the second quarter, the strongest pace in nearly four years. Meanwhile, companies are on a hiring spree and September’s 3.7% unemployment rate is the lowest since 1969.


The last time the U.S. economy saw such a slump in the housing market was after the so-called taper tantrum in 2013, when then-Federal Reserve Chairman Ben Bernanke said the central bank could start winding down its quantitative-easing program, leading to a spike in interest rates that sent asset prices and currencies plunging around the world. The housing market slowed in late 2013 through much of 2014, before rebounding strongly as mortgage rates eased.


Economists say it is unlikely that the economy and housing market can continue to diverge for much longer.


In one scenario, economists said continued wage growth could put more money in consumers’ pockets and lead to a rebound in sales during the critical selling season next spring.


Alternatively, economists say a weakening housing market—which also helps drive furniture sales, building-materials purchases and construction employment—could start to drag down the broader economy. Home construction has faltered in recent months as well. Building of new single- and multifamily homes declined 5.3% in September from the prior month, according to data released by the Commerce Department earlier this week.


“If this is the first chink in the armor and other parts of the economy start to weaken, driven by increases in rates and consumer confidence starting to wane, then I think it could be the beginning of a really soft year,” said Glenn Kelman, chief executive of real-estate brokerage Redfin.


At the end of September, the market had a 4.4-month supply of homes, based on the current sales pace, up from a 4.2-month supply a year earlier. That is below what Mr. Yun considers a balanced market of six months of inventory.


The median existing-home price in September was $258,100, up 4.2% from a year earlier, according to the Realtors group. News Corp., owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors.


Some of September’s weakness was due to Hurricane Florence, which contributed to sales falling 5.4% from a month earlier in the South, according to the Realtors group. But sales were also down by 2.9% in the Northeast and by 3.6% in the West, regions unaffected by the storm.


“Interest rates are starting to bite a little,” said Chris Rupkey, chief financial economist at MUFG. “We’re not going to get 3% sustainable growth if consumers don’t buy cars and homes.”


Write to Laura Kusisto at laura.kusisto@wsj.com and Sharon Nunn at sharon.nunn@wsj.com


Appeared in the October 20, 2018, print edition as 'Slump In Home Sales Deepens.'


To read original article posting, click here: https://www.wsj.com/articles/u-s-existing-home-sales-dropped-in-september-1539957950

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