Economy Watch: Existing Home Sale Wobble in August

Following three straight months of gains, U.S. existing home sales dipped in August.

Unlike new home construction, the sales of existing houses don’t have a huge direct impact on the economy, but they are a barometer of the health of the economy, and more specifically, the financial health and optimism of U.S. households. That’s especially the case in the post-recession lending climate, when obtaining a mortgage isn’t nearly as easy as it was only 10 years ago (arguably a good thing, considering the overheated market of that time). A healthy, but not overheated pace of existing home sales points to sustainable expansion of the economy, especially consumer spending, which benefits retail establishments in particular.

Following three straight months of gains, U.S. existing home sales dipped in August despite slowing price growth and a positive change in the percentage of sales to first-time buyers, according to the National Association of Realtors on Monday. Total existing home sales dropped 4.8 percent to an annualized rate of 5.31 million units in August, compared with 5.58 million in July. Despite last month’s decline, sales have risen year-over-year for 11 consecutive months and are 6.2 percent above a year ago, so the monthly report—unless there’s a longer string of them—could be noise.

Or it could be the start of sluggishness in the market. A drop in buyer optimism isn’t the only possible reason for falling home sales, the Realtors posited. Prices are still rising, perhaps enough to discourage many would-be buyers, and inventories are relatively tight in many markets. In a separate recent report, the association said that despite positive improvements in the labor market, new home construction is currently paltry in most metro areas, a fact that’s contributing to persistent housing shortages and unhealthy price growth.

NAR measured the volume of new home construction relative to the number of newly employed workers in 146 MSAs determine whether homebuilding has kept up with the steadily improving pace of job growth over the past three years. In about two-thirds of the areas, it hasn’t.

Historically, the average ratio for the annual change in total workers to total permits is 1.2 for all housing types and 1.6 for single-family homes, the Realtors calculated. The organization’s research found that through last year, 63 percent of markets had a ratio above 1.2 and 72 percent had a ratio above 1.6, which points to inadequate new construction. Looking ahead, the homebuilding industry continues to face headwinds, including rising construction and labor costs, limited credit availability for smaller builders, and concerns about whether first-time buyers will be able to jump into the game.