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Sales of both newly built and existing homes fell unexpectedly in July, and while it's just one month's data, it may be a signal that the housing market has hit an insurmountable hurdle. It is just plain too expensive. Home prices are higher at virtually every price point, but the gains are biggest at the low end where demand is highest.
The median price of a home sold in July hit $258,300, the highest July price on record, according to the National Association of Realtors. The Realtors divide sales figures into six different price "buckets" in their monthly report. Sales in the range of $100,000 or below were down 14 percent compared with a year ago, while sales of million-dollar and higher homes jumped nearly 20 percent.
More telling is that at the start of 2013, when home prices were just beginning to bounce off the bottom of the housing crash, the share of homes sold above $500,000 was just 9 percent of all sales. Today that share is more than 14 percent. The share of lowest-priced home sales today is less than half of what it was then as well.
"On the lower end, there is virtually no property at a very low price level anymore," said Lawrence Yun, chief economist for the National Association of Realtors. "The same property has been moved up to a different price bucket just because the prices have been rising strongly, over 40 percent price appreciation in the past five years. We are not getting the transactions on the lower end because there is virtually no inventory on the lower end."
In the wake of the housing crisis, investors bought thousands of low-priced, distressed homes, putting a price bottom on the market but also removing lower-priced inventory. The expectation at the time was that if prices jumped, the investors would sell. For the most part, they did not. In fact, investors continue to buy properties, even at peak prices today because both the rental market and the market to flip these homes are so lucrative.
"As long as affordable homes come on the market — either from builders building homes or investors selling rental properties — buyers are likely to buy," wrote Realtor.com's chief economist, Danielle Hale, after the sales release. "The biggest challenges continue to be on the more affordable end of the spectrum, where sales are slipping; meanwhile, we saw sales gains at higher price points, where inventory is more plentiful."
Homebuilders are continuing to increase production and selling homes they haven't even built at a historically fast pace. They are not, however, putting up low-priced homes, even though demand there is high. They argue they cannot make the margins work, given the high costs of land, labor, materials and regulation. The median price of a newly built home recently hit a record high.
Home price gains are now accelerating again, and overheating in several major markets where supply is lowest. Inventory nationally has been falling for nearly three years straight and was down 9 percent in July compared with a year ago. The Realtors' housing affordability index recently fell to the lowest level since 2008, even as mortgage rates hover near record lows.
"The fundamentals of housing demand remain strong, led by solid job gains, faster household formations, and low mortgage rates," wrote Benjamin Ayers, senior economist at Nationwide in reaction to Thursday's sales report. "These suggest that existing home sales should move higher as the year progresses, although actual sales will likely be held back by the lack of inventory."