Lean Housing Inventories Pushing Prices Higher

Oct 26, 2016

Treasury prices have been grinding lower since yesterday's New York close. The action is not due to any one thing but it has pushed yields to the upper support ranges that have held since June so they are moves to be noticed. The 2-year note is yielding 0.87% this morning, matching the high yield from October 11th, with 0.88% support looming. The 10-year note is yielding 1.78%, the highest since October 14th. The next level of support sits above at 1.80% - 1.88% which was the pre-Brexit yield high range.


Economic News


With a sense of closure coming to both the presidential election and a December rate hike, along with the recent status quo stances from other central banks, volatility in the Treasury market is hitting 2-year lows so this drift higher in yield comes with incremental price changes, low volume, and probably even smaller conviction, but testing support levels seems to be the trend for the time being.


Meanwhile, housing continues in cruise mode with home-price appreciation on a steady 5% pace for two years now and part of that appreciation is due to lean inventory levels. The pace of price appreciation, however,  is extremely variable across the country with certain regions in the West experiencing double-digit annual price gains while former manufacturing bastions and eastern cities are experiencing much more modest gains.


Across the country, however, tight inventory levels continue to push prices higher,  particularly as the seasonal decline in listings approaches.  Over the last three years the S&P CoreLogic Case-Shiller Home Price Index has a pattern of falling during the spring/summer selling season, and then rising sharply as it ends and inventory shrinks. The index increased 0.2% in August beating the 0.1% expectation and this resulted in a modest pickup in the annual price appreciation to 5.1% compared with 5.0% annual increase in August.


The existing home sales report released last week also illustrated the lean inventory levels. While the report indicated sales rose more than expected, the inventory level shrank to 4.5 months from 4.6 months in August (see graph below).  While not a big month-to-month move this year has been characterized by declining inventory levels which continues to befuddle real estate analysts. 


By this point many felt the persistent multi-year appreciation would encourage more homeowners to list their houses for sale.  But to date this rush to sell hasn’t happened and new home construction remains a shadow of its former pace.  In addition, we are entering the fall/winter slow season which is likely to add to the scarcity of listings pushing prices yet higher.  And with annual wage gains running in the mid-2% range, expect housing affordability to deteriorate further with some regions like the West slowing from the double-digit price gains experienced recently.


As mentioned above, house price appreciation in the West leads the country boosted by solid economic growth, competitive labor markets and attractive lifestyle  choices.  And while overall housing affordability remains historically strong, the gains in the West are beginning to negatively impact affordability, especially when considering recent annual wage gains have averaged around 2.5% with little indication they are headed materially higher.  Over the last year,  cities with  the best appreciation were Portland (11.7%), Seattle (11.4%), and Denver (8.83%).  Meanwhile, New York (1.73%), Washington DC (2.32%) and Cleveland (2.86%) experienced the lowest annual gains. As the saying goes in real estate: location, location, location.


Finally, consumer confidence, as reported by the Conference Board,  decreased to 98.6 missing the 101.5 forecast and down from the year-to-date high of 103.5 indicating some moderation in confidence as the presidential election approaches. To be fair, the October report still presents the picture of a confident consumer and the numbers in the October report represent more of a moderation  from a two-month jump in confidence in late summer. To wit, the October headline print of 101.5 represents the third highest result this year after September (103.5) and August (101.8). So, the report could be characterized as not so much a drop in confidence as it is a moderation from some over-confidence in late summer. 




Market Update Residential Inventory (Months Remaining)


The residential housing market has been characterized by tight inventory that goes back for several years now.  In the wake of the housing crisis, sales and prices began to rebound in 2012 and inventories have been below six months (considered more or less normal) since mid-2012 as home construction and listing activity has lagged sales. Tight inventory is working to  push prices higher which will impact affordability unless listings/construction activity increases.



Residential Inventory (Months Remaining)





Agency Indications Agency Indications — FNMA / FHLMC Callable Rates


Agency Indications — FNMA / FHLMC Callable Rates



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