It's a red-hot real estate market — so why are home sales plunging?

S E E D E D   C O N T E N T

The number of existing home sales plunged in April, surprising economists who had expected last month's drop to moderate. Real estate experts say this is an indication that shortages of everything from lumber to kitchen appliances are reverberating throughout an already red-hot market — good news for sellers, but a situation that threatens to price out a growing number of buyers, despite mortgage rates that remain near historic lows.

Existing home sales fell from an annualized 6.01 million to 5.85 million, the National Association of Realtors said on Friday. The consensus had been for a tiny uptick to 6.02 million.

The plunge can be attributed to a lack of inventory, said Nick Bailey, chief customer officer at RE/MAX. It's a perfect storm for home buyers: Builders are contending with widespread and unprecedented supply chain choke points just as the swelling population of millennials is seeking to transition into larger homes to accommodate families.

Builders are facing shortages from lumber and copper to PVC pipe and kitchen appliances.

"It's the millennial population driving this market," Bailey said. "A lot of them are turning to new construction, but because of labor and supply costs, builders are being very deliberate about how quickly or how slowly they bring things onto the market." The lumber shortage has been well-documented, but there are a host of other supply chain choke points plaguing home builders, from copper for wiring to PVC pipe — even for often taken-for-granted inputs like kitchen appliances.

This combination of factors means that last year's sharp escalation of home prices is set to continue. According to the National Association of Realtors, the median sales price on an existing-single-family home hit a record $334,500 in March.

"We have a major housing shortage in America," said Lawrence Yun, the trade group's chief economist. The problem predated the arrival of Covid-19, he said, and was greatly exacerbated by a sudden influx of buyers seeking more space while locked down in the early months of the pandemic and a shutdown of construction sites, factories and lumber mills.

"Supply chain issues have added several weeks to the time it takes to build a home," said John Burns, CEO of John Burns Real Estate Consulting. Big builders bid up prices on the items they need for construction and then pass along those costs — and then some — to buyers who are in little position to negotiate given the dearth of available supply, while small builders are often locked out entirely, Burns said.

"Suppliers have to take care of their largest customers first," he said. "The surge in demand that is allowing builders to push price, and putting even more strain on the supply chain as the demand for materials has surged."

Even with much of the American economy returning to normal, those aftereffects will continue to have a long tail, experts predicted. Commerce Department data released earlier this week found that the number of housing starts unexpectedly tumbled to an annualized 1.57 million, compared with expectations of about 1.7 million.

"We've seen a continuation of appreciation in most markets," Bailey said. Too many buyers chasing after too few properties is triggering bidding wars, and, in some neighborhoods, competition is so fierce that many homes are sold before they even hit the market, he said.

According to Zillow, nearly half of the people who sold homes last month accepted an offer within a week. "As millennials age into the peak years of homeownership, we expect that the demand for housing will be very strong in the coming years," said Chris Glynn, Zillow's principal economist.

While low interest rates are contributing to the continued appreciation, even that can't always make a mortgage a financial reality for buyers, Glynn said. "The challenge interest rates can't solve is the one barrier to entry — down payments," he said. "Prices rising definitely adds to the challenge of coming up with that down payment," he said. Programs that let buyers put down less than the traditional 20 percent can help, but in some markets, he said, would-be buyers find that this puts the cost of a monthly mortgage payment out of reach.

"Given the housing shortage and strong demand — there's nothing to suggest home prices will be falling," Yun said.

Yun suggested that President Joe Biden's infrastructure plan should incorporate initiatives aimed at getting buyers into homes.

"It's not a good outcome for the country," Yun said. "We want to make sure that people who are making financially responsible decisions should have access to homeownership. We need to build more, and more consistently, so home prices come down," he said.