Here’s an interesting supply and demand question for you. How can home prices be rising at the same time unit home sales are slowing down? The Real Estate Daily News reported on Tucson's November’s housing sales yesterday. (Click here for full story)
The answer is found in two important numbers, the foreclosure inventory and the lack of inventory.
First, the percentage of distressed sales has decreased as the foreclosure inventory is down by 30% over last year. Since distressed homes sell at a significant discount over non-distressed sales, it makes sense that the median sale price is rising. During the height of the housing crisis, the flood of foreclosed homes exaggerated the drop in home prices, and on the way out of the Great Recession, the rise in home prices will again be exaggerated by the lower number of distressed sales.
Secondly, there is a lack of inventory in many markets, especially at the lower end of the market. Housing sales have been held back by this lack of inventory that we’ve reported on before, and as a result we are not seeing the slower housing sales cause downward pressure on prices.
If there was more demand than supply, prices would be rising or stable at least, regardless of the total number of unit sales. If demand would continue to rise, then housing prices would continue to rise or stabilize. The first factor -- distressed sales --- will become less and less significant as we approached normalized levels of distressed sales. But we’re not there yet.
According to the Tucson Association of Realtors and the National Association of Realtors, existing home sales have slowed and pending home sales have lowered for several months.
What should we expect going forward? The key is demand. If the economy can continue to produce jobs, then we will have a greater demand for real estate. Heading into December, the media stated that November manufacturing employment had increased by 27,000 people.
Unfortunately upon closer look, that 27,000 was the seasonally adjusted number, or if you prefer, a number manually adjusted as opposed to any actual change in employment. Actual manufacturing employment went down by 3,000 people, not up by 27,000. The real change, down 3,000, was normal for November.
Manufacturing is making a comeback, just like the housing market. But let’s base our economic outlook on fact; there was no surge in manufacturing employment in November. The economy is expanding, but there are no new signs for a long-term economic growth.