The housing market is beginning to roar back. Existing home sales have risen for two straight months after suffering declines since the summer months of last year. The pending contracts also show robust gains, implying home sales will further rise over the near term. Also there is sizable pent-up housing demand looking to emerge. The timing is uncertain. But the pent-up demand implies home sales have much room to rise over the next few years.
Existing home sales rose 4.9 percent in May from the prior month after accounting for normal seasonal factors. (Sales increased 12 percent on a raw count, but the bulk of that increase was due to the normal April to May seasonal upswing that occurs every year.) Now that pending home sales have increased by 6 percent in May, the closing activity is assured to rise further over the next two months.
One key factor that had held back home sales late last year and early this year was simply lack of inventory. If there are too few homes for sale then only too few homes will get sold. Now inventories are rising, not only on a monthly basis, but also from the same time one year ago. This bodes very well for more consumers getting into the market. One has to also remember that the increase in inventory is not only in pure supply, but many families are putting their home on the market in order to buy their next desired home. That is, the increases in inventory are also a reflection of increases in demand for home buying.
Newly constructed home sales also have been perking up. In May, new home sales surpassed the 500,000 annualized sales pace for the first time in 6 years. With the quickening pace of new home sales, homebuilders will want to create more dust and construct more new homes. That means more new home inventory on the way.
When home prices were rising at double-digit rates of appreciation, potential homebuyers naturally paused to wonder: is it a new bubble? Or can I afford these prices? But price appreciation has greatly moderated and is rising at only a few percentage points above wage growth. Therefore, potential homebuyers will no longer face the sticker shock and can now make rational decisions about whether or not it makes sense to buy a home.
There clearly appears to be large pent-up demand. Comparing current supporting factors for potential home sales with actual home sales show a mismatch. Back in the year 2000, a good reference year for comparison since there was neither bubble nor bust at that time, existing home sales reached over 5 million while new home sales nearly touched 1 million. Today, home sales activity is below that. However, there are 6.5 million additional jobs and 36 million additional people living in the country. Mortgage rates are also markedly lower today. Therefore, potential home sales are measurably larger than what we are observing. Home sales have plenty of room for a further rise.
The outlook, therefore, is for housing starts and new home sales to rise comfortably this year and the next. Existing home sales, due to a sluggish first quarter, will fall a bit short in annual tally this year, but will show growth in 2015. Home prices will rise, though at a manageable single-digit rate of appreciation over the next two years.
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