Are We There Yet?

Are we there yet? Children ask that question endlessly on a long car trip. Federal Reserve officials are asking it about their drive to curb inflation.

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If economic reports were songs, you might be humming the monthly reports from memory. The numbers have been changing from month to month, but the tune has remained the same. June was no exception. Once again, the reports tell us: The economic recovery, already the longest on record, continues.

Employers are hiring. The 223,000 workers they hired in May beat predictions and reduced the unemployment rate to 3.8 percent– an 18-year low.

Most economic indicators, consumer confidence and consumer spending among them, are pointing upward.

The housing market continues to struggle as rising mortgage rates, rising home prices, and scarce inventories suck the energy out of homebuyer demand.

A Worrisome Wrinkle

Focusing on housing, because it is a worrisome wrinkle on an otherwise smooth economic narrative: Existing home sales in April fell 2.5 percent compared with March – an unwelcome trend during what is supposed to be the busiest homebuying season. The April total also lagged the year-ago pace for the second consecutive month, while pending sales posted their fourth consecutive year-over year decline, belying the strong home buyer demand that real estate agents report and that consumer surveys confirm.

Rising rates and prices are creating acute affordability problems for first-time buyers - purchases in this market segment declined by 2 percent in the first quarter compared with a year ago. But the lack of inventory also appears to be slamming the door on buyers for whom affordability isn’t a defining issue.

That is the reason “home sales are stuck and not breaking out,” according to Lawrence Yun, chief economist for the National Association of Realtors (NAR), who described the shortage of listings as “dire.”

Resilient – But for How Long?

Although analysts note the “resiliency” of home buyers, who have been shrugging off the impact of higher home purchase costs to pursue home ownership opportunities, there are signs that the inventory shortage is nibbling away at demand above the entry-level. Redfin’s Housing Demand Index declined by 1.3 percent in April compared with March, pushing this indicator almost 12 percent below the year-ago level.

“April was the first time in 27 months that we saw a year-over-year decline in the number of customers touring homes," Nela Richardson, Redfin’s chief economist, noted in a report. She attributed the decline largely to the dearth of available homes for sale.

“It's the stubbornly low inventory levels in much of the country that are preventing sales from really taking off like they should be," Freddie Mac Chief Economist Sam Khater agrees. "The underlying demand for buying a home is holding up, and will continue to do so, as long as the economy is generating solid job and income growth,” he argues in a recent report. “Most markets simply need a lot more new and existing supply to cool price growth and give buyers enough choices."

Supply Side Help

There is some good news on the supply front: Single-family home starts in April were more than 7 percent above the year-ago pace and permits for the first four months of the year were 8.6 percent above the same January-April period last year. New home sales, though a little (1.5 percent) below the March level were 11.6 percent higher year-over year.

Jim O’Sullivan, chief U.S. economist for High Frequency Economics, sees “no sign of ongoing weakening” in the April data. “The pattern suggests some loss of momentum, but probably in the form of slower growth rather than contraction,” he told

Zillow Senior Economist Aaron Terrazas agrees, noting in the same article that the slight April decline in new home sales “was actually smaller than expected, and doesn’t represent much of a deviation from the general strength we’ve seen” since the beginning of this year.

Like many analysts, Terrazas thinks a strong economy and demographic trends (as millennials reach prime homebuying age) will continue to offset the contrary forces created by higher interest rates and home prices. But some question just how effectively buyers can resist those economic headwinds – and for how long.

Home prices are rising at annual rate of between 6.5 percent and 9 percent, depending on which index you follow; incomes have not come close to matching that pace. Since the housing market hit its cyclical bottom six years ago, the NAR’s Nun reports, home prices have increased by 48 percent while wages have grown by only 14 percent. “The current pace of price appreciation far above incomes is not sustainable in the long run,” he insists.