Cash is King as Home Sales Soften

New home sales ticked up 1% in July after June figures were revised slightly higher. Sales now sit at 708,000, a 27% drop from a year ago. The West led the gains for the fourth month in a row, while the South reversed three months of declines. The Midwest and Northeast sales fell by double digits. New homes available for sale inched up to 367,000 units, the highest level in almost 13 years, as builders’ backlogs are driving them to list more homes that are not yet finished; that’s about 90% of homes available for sale.

Median prices for new homes continue to rise and exceed $390,000 in July; average prices hit $446,000. Rising materials and labor costs, a lack of inventory and strong demand from investors and well-heeled buyers are all contributing to the surge in prices.

Existing home sales grew 2% in July, marking the second consecutive month of gains. All regions posted sales growth as the supply of homes kept trickling onto the market. Compared to a year ago, sales gained only 1.5%, a stark slowdown to the double-digit growth over the previous 11 months. Sales are now softening and moving upscale.

Median home prices rose 18% from a year ago, while the percentage of all-cash buyers (the wealthy & speculators) accelerated; all-cash buyers accounted for 23% of sales in July versus 16% a year ago. That is crowding out first-time buyers, who have pulled back in response to skyrocketing prices.

Home values are starting to slow in appreciation on a year-over-year basis largely because of the surge in prices a year ago; year-over-year comparisons have grown more difficult. Home values have been accelerating since the Spring of 2020; they have been rising at a double-digit pace since August 2020.

The problem of surging prices becomes systemic when owners tap home equity to leverage those gains. Another reason is that the bubble in home values is becoming a global phenomenon. Other central banks have begun to use regulatory powers to stem the surge in home values.

Inventory of existing homes grew 7.3% in July compared to June but remained well below year-ago levels. The length of time homes are on the market has plummeted to 17 days from 22 days a year ago. The supply of homes for sale peaked at more than a year’s worth of homes back in January 2009. Many of those were torn down and/or not maintained in the years that followed the housing bust. This has contributed to the shortage we are seeing today.

Much of the rise in inventories in July was concentrated in the higher end of the market. There are still not enough homes to match the demand from first-time buyers who accounted for 30% of sales last month and 34% a year ago.

Mortgage rates ticked up in the middle of August when Treasury yields rose after a strong jobs report. That led to refinance applications dropping 5% and applications to purchase a home dropping 1%. Applications for purchase are now 19% below year-ago levels; they have been softening for 13 weeks in a row. The average loan size is at historically high levels.

Bottom Line
Wealthy buyers and speculators are paying cash to get a leg up in bidding wars; first-time buyers taking on mortgages can’t compete and are being crowded out. The surge in prices has caught the attention of central banks in a world looking for returns, as it should.

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