Slower Housing Sales Forecast Long-Term Stability

Sales of newly built homes plunged 14.5 percent between February and March, federal agencies reported on Wednesday.

Housing is growing slower than it has in past recoveries, but that may be a temporary slowdown rather than an indicator of long-term weakness in the sector, much the same as jobs have been slow to recover because of a lack of confidence in the economy, analysts say.

Sales of newly built homes plunged 14.5 percent between February and March, and were down 13.3 percent compared to March 2013, federal agencies reported on Wednesday.

Existing home sales also dropped 0.2 percent between February and March ​to a sales rate 7.5 percent below the pace that occurred in March 2013, according to the National Association of Realtors. That sales volume remained the lowest since July 2012, and current sales are ​“underperforming by historical standards,” a news release from the NAR said​.

“There really should be stronger levels of home sales given our population growth,” NAR chief economist Lawrence Yun said. “In contrast, price growth is rising faster than historical norms because of inventory shortages.”

The average home price increased 0.6 percent between January and February, the Federal Housing Finance Agency reported on Tuesday, continuing a three-month trend of price increases despite the harsh winter weather that damaged other sectors of the economy, including job growth. House prices for February rose 6.9 percent compared with the same month in 2013, the government reported. Home prices have been booming the past couple of years, as a 0.1 percent decrease in November 2013 ended a 21-month trend of price increases that began in February 2012. The previously reported 0.5 percent increase in January was revised downward to 0.4 percent.

New homes are being built, but consumers are not buying in part because confidence in the economy was badly damaged by the unemployment rate and weakening of the mortgage system that occurred during the Great Recession​, says David Blitzer, managing director at S&P Dow Jones Indices. The pace of housing price increases will likely decrease during 2014, however, allowing consumers to catch up, Blitzer predicts.

“It’s no joke when people say the last recession was the worst thing since the Great Depression,” Blitzer says. “It’s going to be a few years before we get back to normal in the housing market.” 

This slowdown in sales will eventually create a more stable market, says Brad McMillan, chief investment officer at Commonwealth Financial Network, noting that the historic ratio of supply and demand for homes predicts slower price growth.

“Prices should continue to increase in real terms,” McMillan said separately in an investor note. “As we learned [between 2008 and 2009] long-term, double-digit price increases lead to a bubble, something we don’t need to revisit.”

Poor home sales may not persuade the Federal Reserve to postpone raising interest rates beyond 2015, McMillan says. The central bank may be willing to begin raising interest rates from near zero “in early 2015, as opposed to mid- to late 2015 as some others have speculated,” McMillan predicts.