Housing Market Tilts Toward Sellers as Inventory Shrinks

A housing-inventory shortage is creating a seller's market, with strong demand pushing up prices even as the pace of home sales declines.

Economists said the imbalances shown in two separate housing-market reports released Tuesday are likely to worsen in the coming months.

Rising prices are "pinching supply because a lot of people who would sell and trade up get worried about how they're going to do the trade-up part," said David Blitzer, managing director at S&P Dow Jones Indices.

Total housing inventory at the end of August declined 6.5% from a year ago, the National Association of Realtors said last week.

The S&P CoreLogic Case-Shiller U.S. National Home Price Index, which covers the entire nation, rose 5.9% in the 12 months ended in July, up from a 5.8% year-over-year increase in June. Home prices hit a new record last September, and the pace has generally accelerated since, as the inventory crunch has worsened.

Meanwhile, purchases of newly built single-family homes fell 3.4% to a seasonally adjusted annual rate of 560,000 in August, the Commerce Department said Tuesday, the second straight monthly decline and the lowest level since December.

Las Vegas, one of the cities the worst hit by the housing bust, had one of the strongest home-price performances in July, with a 7.4% increase in prices over the year ended in July. That put it behind only Seattle, which had a 13.5% annual price gain, and Portland, which experienced a 7.6% increase. Las Vegas prices still remain roughly 31% below their previous peak.

The lack of available inventory appears to be the main drag on sales, but declining demand also might be a factor, as buyers grow weary of rising prices and fiercely competitive bidding wars.

Supply levels for new homes rose in August. At the current sales pace, there were 6.1 months of new homes on the market at the end of the month, a figure that has crept up in recent months and in August hit its highest level since July 2014.

Svenja Gudell, chief economist at Zillow, said that doesn't necessarily suggest the inventory squeeze is easing, because so much of the new construction is happening at the high end, while the critical issue for the market is the shortage of starter homes. The median sale price for a new home sold in August was $300,200.

"Demand should be coming from millennials who now have jobs and are getting into their 30s. If they're facing this rapid increase in price, that may be holding back demand some," said David Berson, chief economist at Nationwide Insurance Berson.

Although the sales pace for both new and existing homes has slowed in the last several months, new homes still appear to be on track for modest improvement this year. New-home sales were up 7.5% in the first eight months of 2017 compared with a year earlier.

Hurricanes Harvey and Irma also are likely to take a toll on the market in the coming months, delaying closings on new and existing homes. The Commerce Department said survey responses were lower than usual in areas of Texas and Florida affected by Hurricanes Harvey and Irma.

The Federal Reserve's recent decision to shrink its portfolio of mortgage and Treasury bonds purchased during and after the financial crisis also could help push mortgage rates up, which in turn could hurt affordability.

Nela Richardson, chief economist at Redfin, said higher mortgage rates could eventually slow home-price growth but it could take a while, in part because more affluent buyers and investors already are making significant down payments.

"It's going to take a while for homeowners to adjust their expectations of what price they should get," she said.

Other recent housing and construction readings have offered a mixed picture of a market with too few single-family homes and too many apartments in some areas.

Sales of previously owned homes, which account for the bulk of U.S. homebuying activity, fell in August to the lowest level in a year because the limited supply of homes has driven up prices, squeezing many would-be buyers.

Overall housing starts slipped 0.8% in August from the previous month, driven by continued steep declines in multifamily building.

Write to Laura Kusisto at laura.kusisto@wsj.com

(END) Dow Jones Newswires

September 26, 2017 16:07 ET (20:07 GMT)