By: Justin Lahart
Updated June 20, 2018 9:40 p.m. ET
There are a lot of people who would like to buy a house, and plenty of them can afford to. Finding a house to buy? That is another issue.
Home sales have been less than brisk this year. On Wednesday, the National Association of Realtors reported that 5.43 million existing, or previously owned, homes were sold in May, at a seasonally adjusted, annual rate, compared with 5.6 million a year earlier. Year to date, sales are running 2% below last year’s pace. That is a somewhat surprising development considering the strong jobs market that is driving up household incomes.
There are a number of factors that might be weighing against home sales. One is that borrowing costs are higher—the average rate on a 30-year fixed mortgage is now 4.62% versus 3.91% a year ago, according to Freddie Mac. Another is that the tax plan’s capping of state and local tax deductions and limiting mortgage interest deductions reduced the incentives for buying a home.
But if demand were lower, housing prices would be falling and inventory would be rising. Neither are happening. The median sales price for an existing home in May was $264,800 versus $252,500 a year earlier. At May’s less-than-stellar sales pace, the inventory of unsold single family homes would be exhausted in 4.1 months. In the 1990s, a typical decade for the housing market, there was a 5.6-month supply of unsold homes, on average.
A lot of the supply issue comes down to how few homes are being built even now, nine years after the recession ended. Tuesday, the Commerce Department reported that there were an annualized 1.35 million housing starts last month—up from 1.12 million a year earlier and the most since July 2007. But that was still below the levels that prevailed even in the 1970s, when the U.S. population was much lower. Bank of America Merrill Lynch economists point out that growth in the stock of U.S. housing has been persistently below working-age population growth throughout the years since the recession.
Moreover, big home builders don’t have much of an incentive to seriously step up the pace of construction. They face less competition than they did in the past—many smaller operators were wiped out in the housing bust. And rising material and labor costs are a further disincentive for boosting production.
That makes it unlikely the housing supply problems are going to be solved soon, and that housing prices will keep heading higher.
Corrections & Amplifications
The median sales price for an existing home in May was $264,800 versus $252,500 a year earlier. An earlier version of this article incorrectly stated that price was $252,500 a month earlier.