Archive for July 2018
Home prices up, sales down
Reuter’s reported this morning that sales of existing homes are down and prices are up. Economists had forecasted an increase year-over-year of 0.6%, according to National Association of Realtors statistics, which would have been a pretty good jump. In fact, sales actually fell by 2.2% from June, 2017 to June, 2018.
Sales rose in the northeast and Midwest, but fell in the west and south. Existing home sales make up about 90% of the market (the other 10% from new homes). As we’ve reported before, rising costs and lack of infrastructure are driving up new home prices and driving down new home availability. This means that demand drives up prices, and ultimately drives down volume. (This was the part of the supply/demand equilibrium lecture that drove so very many college freshmen to major in something other than economics.) Annual wage growth has been stuck below 3% for some time now, and median house prices are now up 5.2% from last year, to a record high of $276,900. According to NAR, this is the 76th consecutive month with year-to-year price gains.
Supply at the lower end of the market — starter homes and rental homes — dropped by 18% from last year. This is problematic since first-time buyers accounted for 31% of all transactions in June. However, economists estimate that in a healthy market, first-time buyers would account for a 40% market share. All in all, these are not the signs of a healthy housing market.
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Inflation outpacing wages. Fed expectations?
Those of us who lived through the 1970’s may think that 3% or 4% inflation is childsplay, but the FED doesn’t necessarily look at it that way. Indeed, they’re an “inflation conservative” bunch, and don’t take too kindly to the CPI heading northward.
An article this morning in CNN Money offers two painful scenarios. First, inflation is nudging up, in no small part from housing costs and health care costs. Add to that the impending impact of the coming Trade War, and the news isn’t very good.
Graphic courtesy money.cnn.com
Second – and we’ve been predicting this – consumer prices are rising higher than wages. The difference isn’t very big at the median, only 0.2 percentage points, but given the disparate increases in incomes in America of late, and the disparate consumptions patterns, this means that the burdens of cost inflation are being disproportionately felt by working families.
More to come….
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Commercial property prices
First, a happy 4th of July to all of our U.S. readers! I’ve spent the day catching up on reading, writing, and napping. I hope you’ve all done the same.
Part of my reading was a recent piece by Calvin Schnure for the members at NAREIT titled Commercial Property Prices Continue Steady Gains. It’s an interesting read, and factually correct. However, Mr. Schnure and I might arrive at somewhat different conclusions. Case in point is illustrated by the graphic below, taken from his article:
Now, if you are running a REIT and want to convince potential investors that the world is rosy, then this is a very pretty graphic. On the other hand, if you are a real estate analyst (ahem…. please hold your applause) you have to wonder what the heck is going on here. I’m particularly concerned with multi-family, which has increased in value on the order of about 60% since the previous peak (December, 2007) but is up by something close to 160% since the trough of 8 years ago. Yeah. That’s a huge run-up. Couple that with the observations (anecdotal, at present) that multi-family vacancies are on the rise nationwide, and particularly, surprisingly, in formerly hot markets like Seattle (just to name names).
I’m not preaching a long-term or even intermediate term demise for multi-family. Far from it, in the long term, these are still worth considering. However, in the short-term, these annualized gains may not be sustainable.
By the way, there’s a lot more in the NAREIT article, and it’s worth reading in its entirety.
Watch this space. We’ll keep you posted.
From a small northwestern observatory... 