Sales of Existing U.S. Homes Fall as Affordability Drops

Sales of existing U.S. homes fell in September for the first time in three months as higher prices and mortgage rates curbed demand in an industry that helped boost the expansion last year.

Purchases dropped 1.9 percent to a 5.29 million annual rate from a revised 5.39 million pace in August that was the strongest since 2009, the National Association of Realtors reported today in Washington. The median price of a house climbed 11.7 percent from 2012, pushing affordability to an almost five-year low, the group said.

“We see a little bit of a bumpy ride,” said Kevin Cummins, an economist at UBS Securities LLC in Stamford, Connecticut, who correctly projected the drop in sales. “The jury is still out on home sales and how much of a pullback we might see due to higher mortgage rates.”

The prospect that Federal Reserve policy makers will trim the amount of money pumped into financial markets means borrowing costs will probably keep climbing in 2014, which will put owning a home out of reach for more Americans, the Realtors’ group said. At the same time, the damage done to fourth-quarter growth by the partial government shutdown raises the odds the central bank will delay cutting back on bond purchases until early next year.

Stocks swung between gains and losses, after the Standard & Poor’s 500 Index rallied to a record at the end of last week, as investors watched corporate earnings to assess the strength of the economy before tomorrow’s jobs data. The S&P 500 was little changed at 1,745.06 at 1:10 p.m. in New York. The S&P homebuilder index slumped 3.2 percent.

Survey Results

The median forecast of 67 economists in a Bloomberg survey called for the pace to slow to 5.3 million. Estimates ranged from 5.1 million to 5.5 million.

Data for August was revised down from a previously reported 5.48 million, a bigger adjustment than usual because the figures were released last month before additional information was available, NAR Chief Economist Lawrence Yun said at a news conference as the figures were released.

The median price of an existing home increased to $199,200 from $178,300 in September 2012, today’s report showed. Purchases climbed 15.1 percent in September from the same month last year before adjusting for seasonal variations.

Rising prices and stagnant incomes combined with higher mortgage rates are making it more expensive to purchase a property, Yun said at the news conference.

Falling Affordability

“Affordability is getting hit quite sharply,” he said. “Lower affordability will hamper home sales going forward.” The group’s affordability index fell to 156.1 in August, the lowest since November 2008, from 160.7 the prior month. It reached a record 213.6 in January in data going back to 1989. A reading of 100 means a household making the median income can afford the median-priced house at current mortgage rates.

Climbing property values are also a concern in the U.K. House prices in London jumped 10.2 percent in October from the previous month, an unsustainable pace, as demand from overseas investors added pressure to a market with an already tight supply of properties, according to a report today from Rightmove Plc. Agents in inner London reported a “buying frenzy” reducing the available stock to nearly nothing, it said.

Sales of existing homes in the U.S. will be little changed in 2014 at 5.18 million compared with 5.16 million this year, according to the NAR’s forecast.

Mortgage Rates

The average rate on 30-year home loans reached 4.58 percent in late August, a two-year high, according to McLean, Virginia-based Freddie Mac, as Fed policy makers signaled they may begin to curb bond purchases. The rate averaged 4.28 percent in the week ended Oct. 17 amid concern that the fiscal gridlock in Washington would hurt the economy.

“We expect mortgage rates to be 80 to 100 basis points higher next year” as the Fed begins to trim bond purchases, said Yun. A basis point is 0.01 percentage point.

The increase in prices represents a shift in the market as younger, first-time buyers find it’s more difficult to purchase, said Yun. Sales of properties priced at less than $100,000 dropped 7 percent over the past year, while those worth $500,000 or more are up 40 percent, he said.

The number of existing properties for sale was 2.21 million at the end of last month, up from 2.17 million at the same time in 2012. It was the first time inventory increased on a year-to-year basis since early 2011, the group said. The number of houses on the market still needs to rise by 30 percent to 40 percent to stabilize conditions, Yun said.

Broad Drop

Purchases declined in three of four regions, led by a 5.3 percent drop in the Midwest. Demand increased 1.6 percent in the West.

Existing-home sales, which are tabulated when a purchase contract closes, are recovering from a 13-year low of 4.11 million in 2008. Annual purchases reached a record 7.08 million in 2005.

A loss of momentum in residential real estate comes after the world’s largest economy benefitted from a pickup in construction last year. Homebuilding contributed 0.3 percentage point to growth in 2012, the most since 2005. That helped gross domestic product expand 2.8 percent compared with 1.8 percent in 2011.

The budget impasse that led to the 16-day partial government shutdown cut fourth-quarter growth by 0.3 percentage point and also means the Fed will wait until March to begin trimming bond purchases, according to the median forecasts of economists surveyed last week.

The shutdown had no influence on the drop in demand in September and any decline this month will probably be made up in subsequent months, Yun said.

Not everyone says existing homes have become too expensive.

Tight Supply

Affordability and population growth will continue to fuel demand and push up home prices, said Steve Schwarzman, chairman and chief executive officer of Blackstone Group LP, which bought about 40,000 single-family homes after real-estate prices slumped in 2007 and 2008. Those properties, which the New York-based investment group rents out, continue to gain value, he said.

“We wanted to take advantage of the fact that, for a five-year period, the number of houses that was built was like half of what was needed,” Schwarzman said on an Oct. 17 earnings call. “There’s a structural shortage,” he said. “Existing houses have to go up more over time because there’s a shortage.”

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