Housing market: Existing-home sales have peaked, Bank of America says

Manhattan
real estate prices have suffered their worst second quarter since
the financial crisis.
Spencer
Platt/Getty

• The top is in for existing-home sales, which make up
  90% of transactions in the US, according to economists at Bank
  of America Merrill Lynch. 
• They cite worsening affordability, higher mortgage
  rates, and price cuts as reasons why sales are unlikely to
  bounce back after peaking in November 2017. 
• They no longer expect existing-home sales to contribute
  to the economy’s growth. 

The largest segment of the housing market has peaked and will no
longer contribute to the US economy’s growth, according to US
economists at Bank of America Merrill Lynch . 

“We are calling it,” the team led by Michelle Meyer said in a
research note on Friday. “Existing
home sales have peaked.”

Sales of existing US homes make up 90% of all transactions and
recovered faster than the market for new homes after the housing
crisis a decade ago. However, sales have failed to top the level
of 5.72 million homes reached in November. To Meyer, that was
likely the high watermark.

“The peak in existing home sales can largely be explained by the
decline in affordability,” Meyer said.

She pointed to the fact that housing prices are close to levels
last seen at the peak of the most recent bubble. Also, mortgage
rates are on the rise, and the Federal
Reserve is expected to raise its
benchmark interest rate this week for the eighth time since
late 2015. 

Bank
of America Merrill Lynch

Meyer also said that homeowners are cutting prices more
aggressively to attract buyers. For example, the real estate
company Zillow is seeing the most price reductions since 2013.
And during the week after Labor Day,
sellers in New York City made the biggest cuts to their
asking prices since 2009, according to StreetEasy.  

“The outcome is that the housing market is no longer a tailwind
for the economy but has yet to become a headwind,” Meyer
said. “Call it neutral.”

Residential investment, which includes construction and brokers’
fees,
fell in the May-June period for a third quarter out of four,
although this weakness was partly offset by a stronger commercial
real estate market.   

Another segment of the market that’s still hanging in there is
the one for new homes. Sales haven’t grown as quickly as the
market for existing homes because after the financial crisis,
lenders with distressed properties were more eager to sell, Meyer
said. Homebuilders, on the other hand, waited for signs of the
the market’s improvement before starting construction. 

Meyer expects them to keep this approach going forward. With
demand hotter than housing inventory in many big cities, it’s one
that could pay off, even if slowly, for prospective homeowners
and for the economy.  

“There is still room for single family construction to expand,
but it is likely to remain slow given challenges finding labor
and dislocations in the market,” Meyer said. 

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