Home Prices Have Further To Go

February Pending Home Sales: -0.4 %.  This leading indicator for existing home sales activity pulled back in February, suggesting existing home sales (which rose 0.8% in February) will soften in March.  Pending home sales fell to 104.8 after a downwardly revised 3.8% increase the prior month, but nonetheless still rest at their second-highest level since April 2010, back when new home credits rocketed demand.  Pending sales are +8.4% over the past year, mirroring new home sale’s +12.3% and existing home sale’s +10.2% over the same period.  February showed a large 9.6% jump in existing home supply, however this fits with historical winter fluctuations, as the NAR has summed up in the following graphic:

monthtomonth inventoryhousing

In January, New home inventories hit a 13-year low at 4.1 months while existing home sales hit an 8-year low at 4.2 months. Supply shortages have consequently pushed prices to an 8.1% annual rate and the largest gain in 6.5 years (See 3/26/13: Case Shiller).  The median sales prices within the existing home sales report were 11.6% higher in February.  Lawrence Yun, NAR chief economist, does not believe we will see any relief from the supply shortage because it takes time for the homebuilders to ramp up production.


Large homebuilders, with a 25% market share, are uniquely positioned to increase production in a tight credit environment.  Indeed housing starts have gained 27.7% over the past year, but independent builders, representing a majority of the market and hampered by unavailable credit, need to ramp up production for inventories to equilibrate and price gains to soften.  Once lending requirements eases so too will prices.  The NAR expects it will take nearly a year for production to ramp up to equilibrium levels.

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