The modest decline in existing home sales in March in Monday's update from the National Association of Realtors (NAR) prompted some pundits to wonder if the housing rebound is topping out. Anything's possible, but the reason why sales slipped in March suggests that the market's suffering from growing pains rather than facing a cyclical turn for the worse.
The issue to consider is the supply of existing homes for sale. Although the inventory of units for sale turned up slightly last month, for the second time in a row, the rise follows several years of falling supplies. Demand, however, keeps rising. As NAR chief economist Lawrence Yun notes in Monday's press release:
Buyer traffic is 25 percent above a year ago when we were already seeing notable gains in shopping activity. In the same timeframe housing inventories have trended much lower, which is continuing to pressure home prices. The good news is home construction is rising and low mortgage rates are continuing to keep affordability conditions at historically favorable levels. The bad news is that underwriting standards remain excessively tight, while renters are getting squeezed by higher rents.
Consider the rolling one-year percentage changes for housing starts, new one-family house sales, and the ratio of houses for sale to houses sold (a proxy for measuring the monthly supply of houses for sale). As the chart below shows, the inventory of homes for sale has been shrinking for the better part of the last two years (gray bars). By contrast, new home sales (blue line) have been rising. Reacting to the demand, homebuilders have been creating more supply, as indicated by the rising level of housing starts (red line).
The supply of new houses for sale, to state the obvious, relies on homebuilder decisions. The fact that new homes are being built in greater quantities reflects the assessment by the industry that demand is rising. In fact, this is just what's been happening. The future's uncertain, of course, but recent history speaks clearly.
This history implies that existing home sales will rise too. In fact, that's been happening, although the shrinking inventory of existing homes for sale was a bottleneck in March. But that too is changing. Given recent market trends, it's reasonable to assume that the inventory will rise in the months ahead and demand for existing houses will follow. That's been the case for new homes, and the momentum will probably support sales for existing units as the year rolls on.
In turn, a growing housing market is a substantial plus for the economy. From rising prices for real estate, which support household balance sheets, to creating jobs and boosting sales for household-related goods and services, a virtuous cycle tends to ensue when the housing market's expanding. Some analysts, in fact, go further. For instance, economist Ed Leamer wrote a few years back that "Housing IS the Business Cycle."
In any case, rumors of the death for real estate's rebound have been greatly exaggerated. "Despite some little turbulence, the residential housing market is still improving," economist Christophe Barraud at Market Securities-Kyte Group tells Bloomberg. "We're in a transition mode where distressed sales are falling and conventional sales are growing, which means stagnation in total home sales. This situation is not problematic because it shows the market is returning to normal."