Economy First Look

Existing home sales fall – all the way down to 1999 levels

US home resales fell 2.8 percent last month, with the supply of houses on the market dipping to levels last seen in 1999.

A home is seen for sale in Roswell, Ga.
John Bazemore/AP/File
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A shortage of houses for sale caused prices to rise and sales to slide in December, putting a pause on the housing market’s recovery.

The Associated Press reported Tuesday that 1.65 million homes were listed for sale last month in the United States, the fewest since 1999. With this limited supply, the median sale price rose to $232,000, up 4 percent from December 2015. This combination of higher prices and fewer options drove away many potential homebuyers: The National Association of Realtors said that sales of existing homes fell 2.8 percent in December.

December’s numbers marked a weak finish to an overall strong year for the housing market, and analysts don’t see the dip in supply as reason for alarm. But it could indicate deeper problems in the market that will need to be solved before more Americans can buy their first homes.

"The dip in housing sales is more a sign of the lack of homes to be bought than the desire to buy homes," Joel Naroff, chief economist at Naroff Economic Advisors in Pennsylvania, told Reuters. "It is hard to sell homes that are not for sale."

For most of 2016, Americans showed a strong “desire to buy.” The year’s overall sales increased 3.8 percent from 2015, to 5.45 million units, according to Reuters. Those were the highest numbers since 2006, when the housing market peaked.

Some investors see the current housing shortage as a simple problem of supply and demand. The share price of D.R. Horton, the largest US homebuilder, rose 6.61 percent Tuesday on hopes that it would ramp up activity to increase inventory.

But to grow the housing market, D.R. Horton and its competitors will need to build houses that first-time homebuyers can afford. In recent years, the real-estate industry has been slow to expand to this group. After sales of pre-owned homes slipped in February 2016, the Monitor reported that, “the real reason for the current housing shortage isn’t a lack of new construction. Rather, it's the gap in prices between mid-level and premium homes that prevents starter homeowners from moving up and first-time buyers from moving in.”

Ten months later, many first-time buyers still weren’t biting. “First-time buyers accounted for 32 percent of transactions last month," Reuters reports, "well below the 40 percent share that economists and realtors say is needed for a robust housing market. They accounted for 32 percent of transactions in 2016.” Inventories of starter and trade-up homes were also lower in the fourth quarter of 2016 than at the start of the year.

Low mortgage rates could lure more first-time buyers into the market. But those rates have been creeping up recently, causing the typical monthly payment to rise by $75, the Associated Press reported. On Saturday, President Trump cancelled an Obama administration plan to cut mortgage insurance premiums on federally insured home loans, one that could have saved eligible borrowers an average of $500 per year.

While these developments likely played into December’s dip in sales, analysts don’t expect the housing market to go into another tailspin.

Admir Kolaj, an analyst at TD Bank, told the Associated Press, "Home buying is likely to face additional headwinds going forward, which include low inventory levels, rebounding prices and higher mortgage rates," but these challenges probably won’t "completely derail" the housing market.

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