US: Home sales forecast lowered  - Wells Fargo

Analysts at Wells Fargo, have further reduced their forecasts for home sales and new home construction following the recent string of weaker housing reports and downward revisions to previous data.

Key Quotes: 

“The economy does not simply grow or contract but rather is constantly evolving. This evolution is readily apparent when gauging the housing market. Sales of both new and existing homes have been weakening for the past six months and home price appreciation has finally broken from its earlier breakneck pace, even in many of the nation’s hottest housing markets. Inventories remain tight but are now growing again, and bidding wars are far less common. Buyers now have a little more negotiating power—something that used to be the norm. We term the current environment as a soft sellers’ market, as sellers remain in a stronger position than buyers due to the continued lack of supply in desirable markets. Buyers are a little more hesitant, however, due to higher mortgage rates and the impact of tax reform on higher priced homes.”

“The persistent slowdown in home sales over the past six months was initially thought to be a supply problem. Inventories of existing homes had been trending lower for more than three years before leveling off around the middle of this year. With fewer homes for sale, existing home sales were destined to fall and have done so. Sales of existing homes through the first nine months of 2018 are running 2.1% below their year-ago pace.”

“New home sales have fared better, as construction has consistently run below the sum of household growth and replacement needs, creating pent-up demand. New home sales through September are running 3.6% ahead of their year-ago pace, although sales have clearly lost momentum more recently.”

“The magnitude and speed at which home sales have weakened is surprising, following just a three-quarter of a percentage point rise in mortgage rates. We suspect the problem is a lack of affordable product in the markets where potential home buyers would like to live. This helps explain why sales turned down well ahead of this fall’s rise in mortgage rates.”

“We have further reduced our forecasts for home sales and new home construction following the recent string of weaker housing reports and downward revisions to previous data. We still see new home sales increasing over the forecast period but now look for just 5.6% growth in 2019 and 5.3% growth in 2020. Much of that increase will come from more affordable homes in the South and West, which will restrain new home price appreciation. With little inventory, new home construction will continue to gradually edge higher.”