All eyes are on housing as the economy shows signs of slowing.
Sales of existing homes including single-family, townhomes, condominiums and coops, declined slightly in May (1.2 percent) with home prices rising near more normal rates of inflation, said the National Association of Realtors® .
With home sales in May 6.6 percent below the 7.14 million-unit level in May 2005 and with widely mixed conditions around the country, NAR's Chief Economist David Lereah said, "There's now a clear pattern of slower home-sales activity in many higher cost markets, which are more sensitive to rises in interest rates, and higher home sales in moderately priced areas which have experienced job growth. Although mortgage interest rates remain historically low, the uptrend in interest rates this year is affecting those buyers who are at the margins of affordability."
One reason home sales are slowing is rising interest rates. According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.60 percent in May, up from 6.51 percent in April. The rate was 5.72 percent in May 2005.
Housing prices have continued to rise, but at a more normal pace than the blistering record-setting prices of 2001-2005. The national median existing-home price for all housing types was $230,000 in May, up 6.0 percent from May 2005 when the median was $217,000.
Explains Lereah, "Overall price appreciation has returned to normal levels as the supply of homes on the market has risen to a balanced range."
But what has economists worried is the fact that housing inventories have now passed the benchmark 6-month supply which indicates a balanced market. When inventories take less than six months to sell, the market is said to favor sellers. Sellers can ask premiums, entertain multiple offers and decline contingencies when there are more buyers than homes for sale. When inventories are above a 6-month supply, a buyer's market takes over and the opposite conditions occur. It's buyers who take longer to shop, wait for bargains, make lower offers, and ask more in concessions.
Total housing inventory levels rose 5.5 percent at the end of May to 3.60 million existing homes available for sale, which represents a 6.5-month supply at the current sales pace, says the NAR.
However, it's important to keep some perspective. As homes become too expensive in some areas, buyers move on to more affordable housing, causing new metros to surge in home values. Or they may sit on the sidelines for a period before buying, as they take more time to peruse rising inventories. Also, slowing sales data show that housing prices are still close to records.
For example, May home sales remained strong in Illinois, which posted the second highest number on record for total sales in the month. According to the Illinois Association of REALTORS® latest report, in May total homes sales were down 2.2 percent to 17,442 homes sold, compared to the previous record for the month of 17,840 homes sold in May 2005. Year-to-date home sales (January through May) totaled 66,161 in 2006, off 1.3 percent from 67,055 homes sold during the same period in 2005.
While inventories rose, so did prices. The Illinois median home price in May was $206,000, up 3.1 percent from $199,900 a year earlier.
In California, where one out of nine American homeowner households is located, the median price of a home shot up 8 percent from a year ago to $564,430 in May. Sales, however, decreased a disturbing 21.1 percent.
Said California Association of Realtors President Vince Malta. "This is the first time since November 2001 that the median price did not increase by double digits, reflecting the return to the more balanced market that we have anticipated."
NAR President Thomas M. Stevens from Vienna, Va., says, "We didn't break the 6-million sales barrier until 2003, so the current level of home sales is still pretty healthy by historic standards. Housing is continuing to support the overall economy by providing a sound foundation for other sectors to grow -- the normalization that is taking place in the housing market is good for the long-term health of the industry."
Bank of America Corporation Chief Economist Mickey Levy said in his testimony yesterday in Washington, D.C., before the U.S. Congress Joint Economic Committee that he believes that the U.S. economy is fundamentally strong, and that growth is sustainable. He also said that the negative impact that slower housing activity will have on consumer spending is overstated, and that consumer spending will continue to grow, although more slowly, despite the concerns about housing.
"The pace of the current expansion is transitioning toward more moderate growth, following a period of robust expansion," said Levy. "This is a natural -- and welcomed -- consequence of the Federal Reserve's interest rate hikes. I project the economy to grow at a 2.75 to 3.0 percent pace through year-end 2006 and expand at a healthy pace in 2007. Continued gains in employment will keep the unemployment rate low. Housing activity and prices will flatten, but not fall materially, and consumer spending will continue to rise, albeit at a more moderate pace. Corporate profits and cash flows, already at all-time highs, are expected to rise further, but at a slower pace than the last several years."
That said, there are risks, notes Levy. "The first is the risk that the Fed inadvertently pushes up interest rates too much, which would generate an economic slump. Presently, this risk is low, and the Fed is well aware of the consequences of tightening monetary policy too much. The second risk is a misguided thrust toward protectionism that could potentially disrupt global trade and capital flows. Congressional authors and supporters of protectionist legislation must be warned that such measures would damage economic performance and hurt many citizens they are intended to help.
"The high U.S. current account deficit and large surpluses in select foreign nations is largely a reflection of the U.S.'s stronger economic and investment growth and low national saving, and the softer economic performance in most industrialized nations and excess saving relative to investment overseas. Although these global imbalances are large, I believe that factors are in place that will begin to narrow global imbalances, and do not anticipate a jarring decline in the U.S. dollar unless there is a dramatic shift in global economic performance.
"Sustained healthy economic performance requires coming to grips with the large Federal budget imbalance. Closing the budget gap ultimately requires reforming Social Security, Medicare and the retirement programs by trimming future benefit structures and making them economically rational. Failure to address these issues is a disservice to the citizenry and only increases the eventual costs of adjustment.
"So far, economic performance has remained buoyant even though the Fed has hiked rates from 1 percent to 5 percent. These rate increases have simply taken away the Fed's monetary accommodation, and have not involved monetary restriction (see Chart 8). The current posture of monetary policy is consistent with sustained economic expansion."
"The Fed has indicated clearly its objective is to keep inflation low. I applaud the Fed's objectives and rate hikes because stable low inflation is the best foundation for sustained economic growth and job creation."
