Pending Home Sales Plunge to Lowest Level in Almost a Year
Pending U.S. home sales tanked in November, to their lowest level in nearly a year. While many analysts, including the National Association of Realtors (NAR), suggest this is a sign that rising interest rates will weigh on the U.S. housing market, it’s important to understand that this data comes from a month before the U.S. Federal Reserve raised its key lending rate.
This suggests that 2017 could be a tough year for the U.S. housing market.
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Contracts to purchase previously-owned homes in the U.S. tanked in November, falling by 2.5% month-over-month, far below the 0.5% gain that economists had predicted. The November reading of 107.3 is also 0.4% below the November 2015 reading of 107.7, and is at its lowest reading since January, when the Pending Home Sales Index came in at 105.4. (Source: “Pending Home Sales Backpedal in November,” National Association of Realtors, December 28, 2016.)
According to Lawrence Yun, NAR’s perpetually bullish chief economist, the slowdown comes amid rising housing prices, tight supply, and rising mortgage rates. Looking ahead, Yun says higher interest rates “somewhat cloud the outlook for the housing market.” But it will get better. Higher interest rates will be offset by stronger wage growth as a result of the 2 million new “job additions expected next year.” (Source: Ibid.)
It’s great that Yun is so optimistic about the U.S. economy, but suggesting that the U.S. housing market is going to get stronger as a result of expected job growth is a bit of a stretch.
Capitol Hill is already championing its track record on job growth and wage increases. Unfortunately, those jobs are low-paying, and many are part-time. And increases in wages have been pretty glacial. It’s doubtful that the so-called 2 million forecasted jobs expected to be created in 2017 will have a significant impact on the U.S. housing market. If anything, rising interest rates and a lack of well-paying, secure jobs will continue to undermine the U.S. housing market.
The weak pending home sales data comes a week after U.S. homebuilding starts and permits fell in November. U.S. housing starts plunged 18.7% month-over-month in November to a seasonally adjusted rate of 1.09 million units. Residential building permits were also disappointing in November, down 4.7% month-over-month (6.6% year-over-year), at a seasonally adjusted rate of 1.2 million units. (Source: “New Residential Construction in November 2016,” United States Census Bureau, December 16, 2016.)
Weak U.S. Housing Data Points to Broader Downside Risk for U.S. Economy
The pain in the U.S. housing sector will gain momentum in 2017 as rising housing prices and interest rates continue to make owning a home less and less affordable. This will have a wide-ranging ripple effect on the rest of the U.S. economy.
For starters, the U.S. housing market is responsible for 15% to 18% of the country’s gross domestic product (GDP). This doesn’t include renovations that new homebuyers undertake, or big-ticket purchases like appliances, furniture, etc. (Source: “Housing’s Contribution to Gross Domestic Product (GDP),” National Association of Home Builders, last accessed December 16, 2016.)
Realtors and homebuilders might be feeling confident, but the fact of the matter is that the housing data is pointing to a lot of pain. Housing starts and permits are down while pending home sales are at their worst level in almost a year.
This isn’t just an odd coincidence. Americans need secure jobs, wage growth, and money in the bank in order to step onto the property ladder and keep the U.S. economy chugging along. They don’t have that. What they are faced with is rising rates, a lack of job security, higher debt loads, and no savings.
Not the best recipe for a robust U.S. housing market.
Wall Street and Main Street may be looking forward to the Donald Trump presidency, but the U.S. economy is simply not doing that well, and it’s being borne out in the U.S. housing data. There is a lot of downside risk as we head into 2017, and the chances of the U.S. economy stumbling and slipping back into a recession is not out of the question.
