You may have seen the report that American existing home sales increased by a record margin during June—they were up more than 20 percent compared to May, which works out to a seasonally adjusted pace of 4.72 million sales.
If you’re not familiar with the term “seasonally adjusted,” basically they take the raw data and adjust for the fact that home sales tend to go up at certain times of the year and down at other times. So with that methodology you can at least hopefully isolate the relevant variables, but obviously that’s going to be tricky during a pandemic the likes of which have been unprecedented in over a century.
Now regardless of the methodology, 20 percent sounds like a lot. But that’s not all either. In fact, even after that record increase in June, there was an even larger increase in July, Sales were up almost 25 percent compared to where they were in June, or a seasonally adjusted pace of 5.82 million. And the upward march continued throughout the summer. So I want to look at some of the reasons for that trend, how I expect it to change over the rest of the year, and what it means for people who have invested in real estate or who are interested in investing in real estate.
But before I get into some of the factors that I think are behind the increase in home sales, I want to talk about the data. Obviously a 20 percent jump followed by a 25 percent jump in the next month seems like an incredible increase, and that’s true, but there are some caveats to get into here.
Up until June, those sales had actually decreased for three consecutive months—March, April, and May were some of the worst months for the coronavirus outbreak in the United States. Even after the big jump in June, home sales were still down overall year over year, and it wasn’t until the even larger jump in July that they got back above their 2019 levels.
There was an increase of 8.7 percent, 5.39 million to 5.83 million in seasonally adjusted numbers, from July 2019 to July 2020. So I just want to clarify that even though June and July were record-setting increases, they were at least partly a rebound from the sharp drop we experienced in the first few months after COVID-19 reached the United States and began to spread. It’s kind of like how the jobs report in May was so “good” because we were bouncing off the plummet in April. But with home sales regardless I think it’s worth examining the last few months to see what changed and whether it will be enough to continue affecting the market.
1. Mortgage rates are down
So the first thing that’s going to have an immediate impact on home sales is the fact that mortgage rates are incredibly low right now. Rates on a 30-year fixed are at like 2.8 something percent.
One year ago, they were almost a full percentage point higher at 3.69 percent, so it’s highly likely that the pandemic played a key role in bringing it down. And even though the difference between say 2.8 percent and 3.69 percent might not sound like much, it can add up to a lot of money when you consider how expensive houses are and how long they take to pay off.
2. Sales were down in the previous months
All right the second reason why home sales spiked despite COVID-19 is that they were significantly down earlier in the pandemic. This is more about statistics than about customer preferences, but I still think it’s crucial for interpreting this data.
As I mentioned earlier, the recent increase in existing home sales came after a few months of drops. For example sales decreased by 17.8 percent in April and then 9.7 percent in May after being seasonally adjusted. So anytime you start below baseline with any statistic, just going back to normal will look like a substantial increase. So again this is like the May jobs report, Trump loved touting it as amazing numbers, but that was only because the numbers were being compared to April, which was abysmal.
Now obviously that doesn’t explain on its own why sales rebounded, but it gives some perspective on what these numbers really mean. Of course when you say that sales increased by 20 percent one month and 25 percent the next it sounds like there’s something unusual going on, but in fact it might just be that people are returning to normal and that looks like a big increase next to how low sales were at the beginning of the pandemic.
And if you dig a little deeper than the headlines, it looks like that’s actually what’s going on here. Existing home sales had a relative peak in February 2020 when they hit 5.76 million at a seasonally adjusted rate. From there they fell to 5.27 million in March, then another drop to 4.33 million in April, finally they bottomed out at 3.91 million in May.
Since that point they’ve obviously rebounded dramatically, sales were at 4.7 million in June, 5.86 million in July, and 6 million in August. So if you look at the data from February to May or from May to August it looks like a huge shift. But when you take it all together, sales only went up by a total of about 4.1 percent from February to August, and that basically means that we’re back to where we were before people started changing their behavior in response to the pandemic.
When I’m interpreting the data, the fact that home sales went down before coming up really tells me two things.
First, there’s the statistical fact that a return to normal will look like an increase when you cut the decrease out of your analysis. So when you say “home sales are up” you should probably also clarify that they’re up from being down, not that they’re actually inflated compared to what you would usually expect.
But there were also probably millions of people who wanted to sell their homes, they had to put those plans on hold due to the pandemic, and maybe now those restrictions are loosening up and they’re ready to move. So some of these sales would have happened in March or April under normal circumstances, but they were delayed to June or July or August so it looks like a spike in sales. That’s not to say that this increase isn’t worth analyzing, just that it’s important to consider that information at the same time.
3. The supply of homes has decreased
Another interesting data point from the recent reports is that even though sales of existing homes have gone up dramatically over the last few months, there are actually far fewer homes for sale than you would expect. In fact there was a lower supply this July than in any July since they started tracking this information in 1982.
That might sound counterintuitive—people are selling more homes, so you might expect a greater supply. But in reality, that shrinking market can make buyers more motivated. And that led to an average home price of $304,100 for July, which is 8.5 percent higher than what it was last July. So this is kind of a microcosm of the impact of supply and demand, when there aren’t as many homes available then you have to pay more in order to compete with other buyers. And from there, well when people are willing to pay more then it’s obviously going to be easier for sellers to find interested buyers.
Now on the other hand, that could all change very quickly if there’s a shift in any of those underlying factors, which is certainly possible in these unpredictable circumstances. If you’ve followed the pandemic and the government response, you probably know that the CARES Act included some pretty extensive relief measures—not just bailouts and stimulus checks, but also mortgage forbearance for federally backed loans and a nationwide ban on evictions for many properties.
That sounds great, and obviously it’s better than nothing, but at the same time forbearance doesn’t actually forgive the mortgage payments. And when it ends maybe you’ll be able to work out a payment plan with your lender, but if the economy continues to struggle it’s possible that we could see a huge wave of foreclosures around the country. Of course when lenders start foreclosing that will lead to an increase in supply, so then maybe prices would go back down and the banks would have to take lower offers just to fill the homes. Now this is all speculation, I can’t tell you exactly what’s going to happen over the rest of the year or in 2021.
All right everyone thanks so much for reading, as always I really appreciate it. This is a developing situation, as I said I don’t know what it’s going to look like over the next few months, so depending on what happens maybe I’ll come back to this topic later on.
Either way, I think this covers a few of the most important factors that are affecting home sales right now. Of course there’s more that I could mention, but to me these seem like the key elements. Now if you’re concerned about the impact of coronavirus on the economy, you’re not sure how things are going to go over the rest of the year or into 2021, I actually made a video on that topic, so you can click here for my thoughts on the recession and whether it’s going to continue causing problems. Thanks again and see you next time.