May housing data has been released, and to the surprise of absolutely no one, new records were set for prices.
The median sales price in the U.S. topped $350,000 for the first time in history, representing a 24% jump over last year and the 111th straight month of year-over-year gains.
The 24% gain we saw for existing home sales in May is the largest YoY gain recorded since the National Association of Realtors began collecting this data in 1999.
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Sales volume and inventory
As prices continue to rise, sales volume continues to drop. Existing home sales dropped about 1% from April to May, which is the fourth consecutive month of declines.
Sales volume is likely dropping for two reasons. First, ever-rising prices are pricing many first-time homebuyers out of the market, which hurts sales. Secondly, inventory remains low. There aren’t enough homes on the market for sales volume to recover in any meaningful way.
There is good news in that regard, though. Inventory did increase for existing homes by about 7% from April to May. This should help improve sales figures, but it will take a more significant increase in inventory to change the current dynamics of the housing market.
The dynamics we’re talking about here for existing home sales are similar to what we see in the market for newly built homes.
In May, the price of newly built homes was up over 18% from the previous year, while the total sales volume for new construction dipped nearly 6%. This is the second straight month of declining sales volume, but just like with existing home sales, inventory did go up, about 5% in the month.
What we see in both existing home sales and new home sales is similar: soaring prices and decreasing sales volume.
As I’ve said before, but I’ll say again, to me, this indicates that the housing market is not going to slow down in the coming months. As long as demand remains high and inventory and interest rates are low, the market will continue on this path.
I know people have differing opinions about that, but the data strongly suggests that the market will continue its current trajectory for the next several months. Of course, data can change, and I’ll be the first to write about it if and when that happens.
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Are we on our way toward equilibrium?
Right now, there is an upward shift in inventory, as noted above, and if that trend continues, it could help return the housing market to a healthier state.
I know this is a ridiculous market, but I encourage you all to think about the long-term here. It’s hard to know exactly how the next few months will play out. But remember that despite rising prices and low inventory, the fundamentals of rental property investing have not changed.
If you can find a cash-flowing deal, lock in a historically low interest rate, and keep a sufficient cash reserve on hand to weather any short-term cash flow problems, rental property investing still offers good returns—if you’re in it for the long run.
When making investing decisions, think about where you think the housing market will be—and where you want to be—in the next five, 10, or 15 years. Don’t worry as much about the short-term craziness that’s happening, as long as you are smart, conservative, and sure to keep enough reserves on hand to weather a short-term problem.
Stay the course, friends.