Dismal December shouldn’t carry over to 2019 home sales

Home sales closed out 2018 on a down note, even as the outlook for 2019 is much improved.

Existing-home sales in December reached the lowest mark of the year, down to 4.99 million on a seasonally adjusted, annualized rate, down 6.4 percent from the prior month and down 10.3 percent from a year earlier.

{mosads}In fact, it was the slowest activity in over three years. Nearly all areas of the country recorded declines: from Dallas to Chicago and from Seattle to Jacksonville. The West region took a particularly large hit, with 15-percent weaker sales compared to one year ago.

Due to the softening demand, homes listed for sale sat on the market for a longer period — 46 days in December 2018 versus 40 days in December 2017 — and overall inventory rose for the fifth straight month on a year-over-year basis.

Consequently, home sellers were less aggressive in pricing homes, with the national median home price rising by only 2.9 percent — the slowest gain since early 2012.   

There are multiple reasons contributing to buyers being held back. The December sales activity reflected shopping and contract signings in October and November, during the time when mortgage rates were creeping higher.

The big decline in the West also attests to another factor affecting buyers, which is housing unaffordability. Job gains have been strongest in many western states, but with home prices rising high and fast, the region simply cannot accommodate more homebuyers.

In the West, home prices have grown by 91 percent since 2012. The gains in other regions were more modest in comparison, with home prices appreciating 57 percent in the South, 48 percent in the Midwest, and 21 percent in the Northeast.

Overall, national home price gains have exceeded income growth in the past six years. Unaffordability has been slowly taking an extra bite out of home sales with each passing month.

The tax changes, which have become less favorable for homeownership, could also be at play, in the limitations on the mortgage interest deduction and the property tax deduction.

In our survey of realtors, 79 percent of respondents indicated no issues nor any discussion, but the remainder needed to respond to questions from their clients on the subject of taxation. This is definitely a fresh issue in 2018 that did not exist in prior years.

A hit to consumer confidence, which is largely correlated with stock market performance, likely undercut home sales as well. The University of Michigan Consumer Sentiment Index has been steadily falling since October, with the latest reading in January hitting its lowest level in over two years.

The impact of the government shutdown is not yet evident in the December home sales, though it will be felt in some fashion and more intently the longer the shutdown. So far, 75 percent of realtors have expressed feeling no impact.

Though most mortgages are open for business, 11 percent of respondents indicated some delays in mortgage approval or availability (U.S. Department of Agriculture rural housing mortgage, for example, is closed) or from needing IRS income verification.     

Despite the souring in December, housing activity for the year as a whole in 2018 was respectable with 5.34 million existing-homes sold, down only 3.1 percent following decade-high home sales in 2017. New home sales may have squeaked out a gain (though data is not available due to the government shutdown). The national median home price set an all-time high at $259,100, up 4.8 percent.

The outlook for 2019 looks quite good. The Federal Reserve has changed its stance regarding monetary policy. Rather than four rate hikes in 2019, as was widely assumed to be the case just a few months ago, the Fed is likely to raise its short-term rate just once.

This shift has quickly led to a measurable fall in the rate on 30-year, fixed-rate mortgages, from 5 percent in early December to 4.5 percent as of mid-January. As a result, the outlook for home sales improved. The past relationship suggests an additional 200,000 sales for every 50-basis-point reduction in the cost of money.

Such a gain will more than compensate for the reduction in home sales (by 170,000) that occurred in 2018. With the return of homebuyers, home prices look to rise again in 2019, but with one big difference. For the first time in years, income gains of a projected 3.5 percent will outpace home price growth of around 2 percent. That is healthy and a turn toward better housing affordability.

Lawrence Yun is the chief economist for the National Association of Realtors.