Kristian Rouz — US home sales posted a decline in June, extending the contraction for a third consecutive month, despite an overall favorable economic environment. The robustly expanding economy has pushed property values even higher, whilst supply-side constraints exacerbated the affordability issue, fending off some potential buyers.
According to a report from the National Association of Realtors (NAR), pre-owned home sales dropped 0.6 percent to 5.38 million units last month. This comes as construction activity has been sluggish amidst rising interest rates and gains in the costs of materials and labor.
"The overall economy is in great shape, but there are a few cracks in the armor," Joel Naroff of Holland, Penn.-based Naroff Economic Advisors said. "The key housing market is suffering from a major case of agita."
The annual contraction in the existing home segment increased to 2.2 percent in June, reflecting structural constraints in the housing market. New construction has been subdued due to an excessive regulatory burden, contributing to an ongoing rise in property values.
Overall US home sales have declined in five of the first six months of this year, and economists say the issue can only be resolved by adding new housing supply to the market.
Meanwhile, US GDP growth is expected to average four percent this year, coupled with an expansion in private-sector activity, rising salaries and wages, and gains in broader inflation. A stronger economy typically drives asset values, and housing affordability is projected to get worse.
"The housing market led the general economy out of the recovery and now it's leading" towards a slowdown, Aaron Terrazas of Zillow said.
However, the housing market is going down after reaching its peak couple of years earlier — as the stimulative effects of tax cuts have failed to translate into a higher demand for homes.
And the low demand for housing isn't encouraging homebuilders to ramp up their activity — as a new supply of unsold new homes — due to their prohibitively high value — would add to the inventory without generating additional revenue.
"Residential construction won't add much to second-quarter GDP growth," Sal Guatieri of Toronto-based BMO Capital Markets said. "Thankfully, there are still plenty of other cylinders — consumers, businesses, and exporters — to fuel this economy amid turbo-charged fiscal policies."
In the most affordable segment of the housing market, sales dropped 18 percent year-on-year in the most alarming development so far. This happened due to the mounting indebtedness of American households, who can hardly afford home ownership any longer amidst the rising costs of new credit and refinancing products.
The US housing market appears to be trapped in a vicious cycle of supply-demand contraction. Elevated home prices hamper the demand, which discourages homebuilders from adding new supply, fuelling the shortage that drives the prices even higher.
There is a possible solution in the form of more decisive deregulation, especially pertaining to zoning and urban development. By dramatically decreasing the regulatory hurdles, local, state and federal authorities could bring down homebuilder input costs, which in turn could produce an additional supply within the same budget projections.
This could alleviate the affordability crunch, whilst a possible second round of tax-cuts could support longer-term gains in household purchasing power that would possibly re-ignite home-buying activity.