If you were looking for signs that the red-hot housing market is beginning to cool, you would have been hard-pressed to find them in the latest batch of economic data.
Sales of new and existing homes, already at record levels, rose again in June. Adding together the two categories, single-family home sales have gone from a rate of about 6.5 million in mid-2002 to about 8 million last year to 8.7 million as of last month.
Residential construction also has been on a tear. Housing starts have been steady at a rate of more than 2 million a year for the past three months, which is considered strong although a bit below the rate of January and February, which was boosted by hurricane-related rebuilding in the South. Investment in housing rose at a 10 percent rate last quarter and was an important contributor to the economy's 3.4 percent growth rate.
The latest pricing data also offered more evidence for what one industry analyst called a “frenzy” in sales. The national median price for existing homes jumped to a record $219,000, up 15 percent from a year ago, the fastest rate of growth in 25 years, according to the National Association of Realtors, a trade group. That pushed the Realtors’ affordability index, which compares incomes with home prices, to its lowest level in 14 years.
Meanwhile the median price for a new home fell to $215,000 — about the same as a year ago but down from a peak of $237,000 in February. The new-home figures can be volatile from month to month because they reflect different regions types of housing developments that become available for sale.
“I think what is happening is that everyone is scanning the data extra carefully to see if they can pick up any signs that the market is cooling and on their face the data don’t show that,” said Mark Obrinsky, chief economist for the National Multi Housing Council.
Joel Naroff of Naroff Economic Advisers agreed, saying the market is getting “out of hand.” Cocktail-party and office chatter he hears nowadays is reminiscent of the tech-stock boom of the 1990s, except that now would-be investors are looking to make a killing by flipping unbuilt condo units.
“When you see everyone starting to get into these deals, it’s getting beyond crazy,” he said. “People are saying, I’ve got to buy now, because if I don’t I’m never going to get into the market.”
One possible crack in the market cited by some analysts this week was that the number of single-family homes authorized but not yet started has risen sharply over the past year to a record 177,000, compared with 143,000 a year ago.
“That suggests to me that there is a speculative element developing with home builders, and that usually is the beginning of the end,” said Paul Kasriel, research director at Northern Trust in Chicago.
But Michael Carliner, an economist with the National Association of Home Builders, said the number could reflect an effort by some builders to get their permits lined up farther in advance of construction.
With much of the nation’s new-home building controlled by a few large publicly owned companies, builders are being careful not to get too far ahead of demand, Carliner and others said. Although the construction market is highly fragmented, the 10 biggest builders now control 22 percent of the market, up from 9 percent a decade ago, Carliner said.
“As long as the intelligence is there, they won’t put it up until they have the sale,” said Naroff. “The risk of a meltdown like we had in the early ‘90s is not as great. The home builders are managing the boom.”
Industry executives frequently point to the relatively tight inventory of new and existing homes for sale, about four months’ supply, compared with a typical six to nine months of supply in the mid-1990s and up to 11 in the 1990-91 recession.
But housing inventory figures can turn around in a hurry, especially if interest rates rise sharply, sending buyers to the sidelines. That is particularly true given the total number of new and existing housing units for sale, which is up 11 percent from year-ago levels.
“I think the level of building is too high and will result in overbuilt housing markets if we stay at these levels of construction,” said Mark Zandi, chief economist of Economy.com. “Right now we are measurably over what we need in the long run. If there is any weakening in home sales at all, then that inventory of homes for sale is going to rise very rapidly.”
Industry officials said any additional supply coming on line would be welcome. “Supply is still currently very tight, and home prices are rising at double-digit rates nationally,” said Lawrence Yun, senior forecast economist for the Realtors. He called the current market an unsustainable “frenzy” with prices moving up so fast in many markets that buyers, sellers, real estate agents and appraisers are having trouble making accurate assessments.
Zandi said that with home sales continuing to rise to “extraordinary” record levels, the Federal Reserve likely will raise short-term rates more aggressively in an effort to force banks to stop offering what are essentially financing incentives to lure more buyers into the housing market.
“At this point the Federal Reserve is implicitly targeting housing,” Zandi said. “The only way to slow housing is to raise short-term rates enough to overwhelm the ability of lenders to come up with new loan products.”
It could take a while. Although market interest rates have been rising steadily over the past month, 30-year fixed rate mortgages are still available for well under 6 percent, as they have been for most of the past several years.