U.S. home sales jumped to their highest level in nearly two years in December, the latest indication that lower mortgage rates are helping the housing market to regain its footing after hitting a soft patch in 2018, though record low inventory could be an obstacle to continued strong gains.
The report from the National Association of Realtors on Wednesday followed on the heels of government data last week showing homebuilding raced to a 13-year high in December. Renewed housing market momentum could soften some of the hit on the economy from manufacturing as the thaw in U.S.-China trade tensions is offset by Boeing’s suspension this month of production of its troubled 737 Max plane.
“The previous weak link, housing, is coming back, but the current laggard, manufacturing, is slowing further,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
Existing home sales increased 3.6 per cent to a seasonally adjusted annual rate of 5.54 million units last month, the highest level since February 2018, boosted by a surge in sales of multi-family housing units and gains in single-family home dwellings. November’s sales pace was unrevised at 5.35 million units.
Economists polled by Reuters had forecast existing home sales would increase 1.3 per cent to a rate of 5.43 million units in December. Last month, existing home sales rose in the Northeast, West and the populous South. But sales fell in the Midwest.
Existing home sales, which make up about 90 per cent of U.S. home sales, surged 10.0 per cent on a year-on-year basis in December. For all of 2019, sales were unchanged at 5.34 million units.
The report helped to lift the PHLX housing index. Stocks on Wall Street were trading higher, also cheered by an upbeat forecast from IBM and China’s efforts to contain a new flu-like virus outbreak. The dollar was little changed against a basket of currencies, while U.S. Treasury prices were mixed.
The housing market is being supported by cheaper mortgage rates after the Federal Reserve cut interest rates three times last year. The 30-year fixed mortgage rate has dropped to an average of 3.65 per cent from its peak of 4.94 per cent in November 2018, according to data from mortgage finance agency Freddie Mac.
But the sector, which accounts for about 3.1 per cent of gross domestic product, remains constrained by a lack of homes, especially in the lower-priced segment of the market, because of land and labor shortages.
The supply squeeze and resulting reacceleration in house price inflation could slow home sales this year.
According to the NAR, there was a 14 per cent drop from a year earlier in sales of houses priced $100,000 and below.
“Still, with rising incomes, more households being formed, and low mortgage rates, demand for housing should remain robust to keep home sales activity at an elevated level – although likely little changed from 2019,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio.
LIFT TO GDP
December’s increase in existing homes sales likely means more in brokers’ commissions, which suggests that housing probably contributed to GDP growth again in the fourth quarter. Residential investment rebounded in the third quarter after contracting for six straight quarters, the longest such stretch since the 2007-2009 recession.
The Atlanta Fed is forecasting GDP to rise at a 1.8 per cent annualized rate in the fourth quarter. The economy grew at a 2.1 per cent rate in the July-September period. The government will publish its snapshot of fourth-quarter GDP next Thursday.
There were a record-low 1.40 million previously owned homes on the market in December, down 14.6 per cent from November and 8.5 per cent from a year ago. As a result, the median existing house price soared 7.8 per cent from a year ago, the most since January 2016, to $274,500 in December. House prices increased 4.8 per cent in 2019.
The NAR report likely exaggerates the pace of house price appreciation because of sampling methodology.
In a separate report on Wednesday, the Federal Housing Finance Agency (FHFA) said its house price index rose a seasonally adjusted 4.9 per cent in November from a year ago, slowing from an increase of 5.2 per cent in October.
According to JPMorgan economist Daniel Silver, the FHFA measure is considered one of the more reliable house price measures “that control for changes in the mix of sales.”
The NAR report showed that at December’s sales pace, it would take a record few 3.0 months to exhaust the current inventory, down from 3.7 months in November.
A six-to-seven-month supply is viewed as a healthy balance between supply and demand.
Last month, houses for sale typically stayed on the market for 41 days, up from 38 days in November, but down from 46 days a year ago. Forty-three percent of homes sold in December were on the market for less than a month.
First-time buyers accounted for 31 per cent of sales last month, slightly down from 32 per cent in November and a year ago. They accounted for 33 per cent of all transactions in 2019.