By Steve Murray, Publisher, REAL TRENDS

In virtually every market in the country, inventory levels are at record lows, absorption rates are at all-time highs, and prices have risen far faster than the rate of increase in household incomes. Each of these factors had a hand in the NAR report that says existing home sales were down back in April; so was the pending home index.

We are more likely than not headed for a slowdown in housing sales in the near term. In the past, housing sales dipped due to slower economic growth or rising interest rates. Now, it’s due to the lack of inventory and the decline of affordability for many households to afford the soaring cost of new and existing homes. One good example is in San Francisco where homes are measurably down, in fact, sales have been down for more than just the last year, and prices are softening.

This downturn is more of a pause than a typical slump in housing sales. Prices have outrun incomes. Mortgage rates, while still historically low, have risen somewhat and are due to rise further. Household incomes are still growing and will likely continue to do so even given that two large sectors of the economy, energy and agriculture, are both in slumps. The absence of a downturn in the overall economy and the presence of a persistent strong demand for housing, indicates that while the downturn in unit sales could last for some time, it won’t be anywhere near as severe as the last downturn.

One last indicator that we observe is the percentages of all households that are buying homes in each year. Studies we produced for clients suggest that the normal percentage of all households that purchase a home in each year is approximately 4.6 percent. That is very near where we are today. We believe this is a good indicator that we are at a normal level of housing sales now—anything above that signals overheating.