- Pending home sales popped a nice 0.7% in May, following a 10% surge in new home sales. Both were expected to drop noticeably.
- Consumers may be jumping before rates move higher – but this surge is as much about ongoing tight supply of housing in the US.
- Conventional wisdom expects housing to crash in light of higher rates and the prospect of a recession.
- But this is not the late 1980s or 2008 when housing supply far exceeded organic demand. Housing is unlikely to be the economic deadweight it was then.
Housing Downturn Is Not Here Yet
Pending home sales ticked up a surprising 0.7% in May – consensus expected a 4% decline. (Pending home sales is a measure of contract signings to buy an existing house, as opposed to existing home sales, which measures closings.)
There is strong conventional wisdom that housing will get clobbered in coming months and quarters due to higher rates and a possible recession. And that is why consensus was so bearish. In that light, you might view May pending sales as a final dash to get through the door before things go completely awry.
Lack of Inventory Is the Problem
But a big complication in trying to interpret pending home sales (and other housing data) is the shortage of housing inventory. National Association of Realtors data show existing housing supply is a scant 2.6 months (time to sell a house at current sales rate) – six months is considered a balanced market.
If home sales drop in coming months, it will be partly because of conventional wisdom factors (e.g., higher rates). Yet a lack of supply will be the bigger factor – you cannot buy what is not available.
To drive the point home, new home sales in May (reported last Friday) jumped 10.7% MoM; consensus expected -0.2%. Yes, there was presumably a mad dash in response to higher rates, but it was underpinned by ongoing tight supply of housing in the US.
Housing will soften in coming months. But do not expect it to be the economic sinkhole that it was in the late 1980s or 2008 when overbuilding overwhelmed organic demand. Barring outright economic collapse, there will be more people who want to buy houses than available supply for a while yet.