Good affordability and improving labor market should continue to shore up U.S housing demand

U.S. existing home sales increased by 6.1% to 5.19 million (annualized) in March, the fastest pace in 18 months. The number of transactions was well above the 5.03 million pace expected by the market. Sales increased in both the single family (5.5%) and condo/co-op segments (11.1%).

The report was an uplifting one especially after months of disappointments during the harsh winter. Most metrics showed sizeable improvement, with the upturn particularly pronounced in the Northeast and Midwest regions, which were especially influenced by winter factors. In addition to the improved activity, it is encouraging to see an uptick in inventories. At 4.6 months' worth of sales (and 4.5 months for single-family segment) these remain tight. 

"However, prices are rising robustly, and as the market continues to heal price gains should motivate potential sellers, who may be currently constrained from listing due to negative or near-negative equity positions, to put their homes on the market, enabling more activity." said TD Economics

At the same time, the demand should continue to be shored up by still good affordability and an improving labor market. Prices should continue to rise, and rates may trend higher, but both should do so only gradually, while overall affordability should be buoyed somewhat by income gains resulting from a healing labor market.

Risks remain with first-time homebuyers still underrepresented in the market given their restricted access to credit and lofty student debt. However, recent initiatives - such as 3% down payment and reimbursement of closing costs for first time homebuyers on select properties - should make buying for first-time homebuyers increasingly attractive. 

"Overall, we believe that continued improvement from a slow winter-impacted start of the year is in the works with market fundamentals increasingly supportive, and expect the existing home market to have its best year of the recovery with sales likely to rise to nearly 5.5 million later this year." adds TD Economics