11:11 GMT +319 July 2019
Listen Live
    A view of the Federal Reserve

    US Pre-Owned Home Sales Continue Decline Amid Robust Economy

    © AFP 2019 / BRENDAN SMIALOWSKI
    US
    Get short URL
    0 10

    Existing home sales have declined for a third straight month, reflecting housing affordability, whilst the entire homebuilding industry is mired in structural deficiencies stemming from excessive regulation and mismanagement in urban development.

    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.

    READ MORE: For US, ‘Modern-Day Slavery Is a Feature of the Current Immigration Regime'

    The pre-owned homes segment — typically, a more affordable option for first-time buyers — is feeling the demand-side squeeze as well.

    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.

    Such a paradoxical situation stems from a structural discrepancy in the US economy. The broader economy has defied the late-cycle dynamics of a general slowdown due to the Trump administration's fiscal stimulus.

    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.

    READ MORE: US Proposals to Eliminate Trade Barriers Taken Seriously by Allies — US Treasury

    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.

    READ MORE: Trump Ponders NATO Article 5: Montenegro 'May Get Aggressive & You're in WWIII'

    According to a separate report from the Commerce Department, new housing construction dropped 12.3 percent to 1.173 million units last month, its nine-month lowest. Meanwhile, economists say homebuilders must add 1.5-1.6 million new units to the market to relieve the supply insufficiency driving home prices through the ceiling.

    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.

    READ MORE: US Mulls Uranium Import Probe, New Tariffs Looming — Reports

    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. 

    Related:

    'US Sanctions on Russia May Backfire and Hurt Global Economy' - Market Analyst
    Biggest 'Confidence Killer' for World Economy: Beijing on US-Led Trade War
    Analyst Suggests US Aiming to Move Global Economy 'Back to 20th Century Model'
    US Economy May Go Bust if Dollar Loses Its Reserve Currency Status – Economist
    Tags:
    economy, GDP, US National Association of Realtors (NAR), United States
    Community standardsDiscussion
    Comment via FacebookComment via Sputnik