Q2 2016 Market Report: Tight Inventory Leads to a Need for Speed

  • On average, homes stay on the market for 78 days before closing – more than a week less than a year ago.
  • There are 4.7 percent fewer homes for sale nationwide than there were a year ago.
  • The Zillow Home Value Index rose 5.4 percent over the last year, to $187,000 in June. Rents rose 2.6 percent to a Zillow Rent Index of $1,409.

It’s well known that a lack of homes for sale is limiting home buyers’ choices this home shopping season. But this inventory shortage is also contributing to another home buying hurdle – along with limited options, buyers also have increasingly limited time to make a decision on a home purchase.

The typical U.S. home sold in May (the latest month for which data is available) spent just 78 days on the market, more than a week less than the same time last year (86 days), according to the Q2 2016 Zillow Real Estate Market Report (figure 1). And not only is the time a home spends on the market currently much less than recent months, it’s also well below historic norms. Since the beginning of 2010, the long-term monthly average of the time a typical U.S. home spent on the market before selling is roughly 111 days.

Homes are selling more quickly this year than last in 27 of the nation’s 35 largest metro housing markets – in some cases, much more quickly. In Charlotte (70 days), Philadelphia (98 days) and Pittsburgh (97 days), homes are selling more than two weeks faster this spring compared to a year ago. In the eight markets where homes are taking longer (or at least as long) to sell this year than last, the phenomenon may be more attributable to the fact that realistically, homes in those areas can’t sell much more quickly. In seven of those eight markets, homes are selling more quickly than the current national average of 78 days (Miami, at 103 days, is the lone exception).

Markets in the Bay Area and Pacific Northwest epitomize this need for speed. In San Francisco and San Jose, the typical home sold in just 43 days in May, the fastest-moving large markets in the nation. In Seattle homes sold in 47 days, and in Portland homes sold in 51 days. Considering it typically takes a minimum of 30 days (and often 45 days or longer) for a home sale to close once an initial offer is accepted, the window a buyer realistically has to look at a home and decide whether to make an offer in these markets is astoundingly brief.

Inventory: Even When it’s Up, it’s Down

This increasingly fast-moving market is largely a product of increasingly tight inventory. The number of homes for sale nationwide as of the end of Q2 was down 4.7 percent from the same time a year earlier, and was down year-over-year in 24 of the largest 35 metro markets. The number of homes for sale nationwide has fallen on an annual basis for the past 17 straight months, and in 46 of the past 55 months (figure 2).

And even in those large markets where inventory has risen over the past year, the number of homes for sale remains well below recent highs. In San Antonio, for example, inventory was up a big 20.4 percent year-over-year at the end of Q2 – but still down 61.5 percent from its June 2011 high. In San Jose, inventory rose 15.2 percent in June compared to a year earlier, but is still 61.1 percent below March 2011 highs.

When there are so few homes on the market in the first place, it makes sense that those that are available would be scooped up more quickly. But in addition to the speed of the market being a product of limited inventory, that speed may also be contributing to that scarcity of inventory too. Potential sellers might love the attention their home will get once listed – and the chance for a windfall profit if a bidding war breaks out over it. But many of those sellers also have to turn around and become buyers. They may end up in a bidding war of their own once they try to buy in this environment, if they can even find a suitable home to begin with. Instead, it’s likely that many current homeowners who don’t have to sell are choosing to stay put rather than enter the fray – which in turn only contributes to tighter inventory.

It all adds up to a very competitive market for buyers, and a fast-moving (and potentially very lucrative) market for sellers. In an environment where one may have only a few days to decide to make an offer on a home, it’s critical that buyers and sellers enter the market prepared and with clear eyes, and to resist the temptation to settle for a home that may not suit their needs in the interest of just buying a place. It’s tough going out there, but the right home will become available for those that are patient but prepared to strike fast once it comes on the market.

Home Values: The Pressure’s On

The scarcity of inventory – and the rush to buy those homes that are available – is keeping the upward pressure on home values themselves. At the end of Q2, the median U.S. home was worth $187,000, according to the Zillow Home Value Index, up 5.4 percent from a year ago and 0.4 percent from May (figure 3). National median home values have risen on an annual basis for 47 consecutive months.

Home values rose year-over-year in June in 34 of the country’s 35 largest metro markets. Annual home value growth was faster than the U.S. average in 23 of the largest 35 markets. Among those large markets, annual home value growth in June was fastest in Portland (up 14.8 percent), Denver (12.7 percent) and Dallas-Fort Worth (12.1 percent). Annual growth was slowest in Indianapolis (down 4 percent), Washington, D.C. (up 2 percent) and Baltimore (2.2 percent).

Rents: Reliably Rising

With all the attention paid to rising home values, tight inventory of homes to buy and the increasing speed of the home purchase market, it’s critical not to lose sight of the rental market. In June, national median rents rose 2.6 percent year-over-year and 0.1 percent from May, to $1,409 per month, according to the Zillow Rent Index (figure 4). Similar to home values, on an annual basis, U.S. rents have risen or remained flat for 47 consecutive months.

Rents rose year-over-year in June in all 35 of the country’s largest markets. The annual pace of rental growth was fastest in June in Seattle (up 9.7 percent), Portland (9 percent) and San Francisco (7.4 percent). Interestingly, rents are growing so quickly in Seattle that they grew faster in one month (up 1.1 percent in June from May) than in an entire year in the Chicago (up 0.9 percent from June to June), Washington, D.C. (0.9 percent year-over-year), Cincinnati (0.7 percent) and Indianapolis (0.7 percent) markets.

Outlook

Looking ahead, Zillow expects national home values to continue growing, rising another 2.9 percent through June 2017 to a Zillow Home Value Index of $192,493. U.S. rents are also expected to keep growing over the next year, at a 2.6 percent pace through June 2017 to a Zillow Rent Index of $1,445.

Homes are selling faster than ever as the home shopping season hits its peak. For those looking for a home, be prepared to move quickly. Adding to this difficult buying environment is low inventory – there simply aren’t many homes to choose from. And while this looks like a good time to be a seller, potential move-up buyers may hesitate to list their homes and become buyers. Until the supply increases, it will remain a tough market to find a home.

For those looking to buy a home in a competitive market, here’s some tips to keep in mind:

  • Meet with your lender early and get preapproved for a loan – even before you begin seriously shopping for your new home.
  • Work with an agent who has expertise in the local market. Read reviews on local agents and find someone with a successful record in a tough market.
  • Request to pre-inspect a home before submitting an offer. You risk losing a few hundred dollars if you end up not wanting the house; but if you do, you’ll be able to submit an offer not contingent on home inspections.

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Chip Case: A Visionary, and a Friend

Karl Case
Karl “Chip” Case

I am deeply saddened by the news of the passing of Karl “Chip” Case. Chip was truly one of a kind, a man at once generous, brilliant and curious.

Zillow was born out of a groundswell movement among consumers, researchers and policymakers for more data around everything housing in America. And in no small part, that movement itself owes its beginnings to Chip Case’s work at Wellesley College and the groundbreaking home price index that bears his name.

Prior to the index Case developed alongside Yale University economist Robert Shiller, there was very little transparency in housing beyond what one could glean at a dusty local registry office or by poring over years of county tax records – which wasn’t much. The kind of “basic” housing data we take for granted today, the ability to see how a given housing market has performed over time and relative to other markets, was simply unavailable prior to Case and Shiller’s pioneering efforts.

Given housing’s outsized impact on both the economy and our everyday lives, it’s almost impossible to understate the importance of Case’s achievements in shining a light on this sector. The events of the past decade alone underscore this – and the Case-Shiller index has been providing this insight for upwards of 30 years.

Beyond Chip’s intellectual and academic achievements, what struck me most when I began our journey at Zillow was his intellectual curiosity, openness to new methods and ideas, and generosity of his time in thinking through better ways to understand housing markets. From our earliest days at Zillow, we were interested in exploring newer methodologies for creating housing indices that leveraged more data than was available when Chip and Bob first started out. Our efforts resulted in the Zillow Home Value Index, which uses a hedonic approach instead of the repeat sales methodology used by Case-Shiller.

Rather than being content at stopping at the considerable progress he’d driven personally, Chip always acknowledged that his work was a beginning, not the end, and he was eager to talk with us about new approaches. And his work continued beyond the Case-Shiller index. The Zillow Housing Confidence Index was born out of Case and Shiller’s seminal work at trying to illuminate not only home prices, but the underlying aspirations, expectations and assumptions of homeowners and buyers themselves. It’s important work that we’re proud to continue today in partnership with Terry Loebs at Pulsenomics, a close colleague of both Case and Shiller.

Chip will be greatly missed. He was always striving not only to keep a light on housing, but to make sure that light was as accurate, bright and unblinking as possible. May we all be inspired by his tireless, selfless devotion to the truth.

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A Wealth of Problems: How the Housing Bust Widened the Rich-Poor Gap

  • Of all homes foreclosed upon nationwide after December 2006, 46.7 percent were in the bottom-third of all homes in terms of value, compared to only 16.6 percent of foreclosed homes in the top third.
  • If bottom-tier homeowners had been able to avoid foreclosure, they could have realized big gains in their personal wealth as the value of their homes grew during the recovery.
  • Throughout the recovery, foreclosed U.S. homes showed greater annual appreciation than homes in general, peaking at 12.4 percent in January 2014, and falling to 6.8 percent by April 2016. Overall U.S. home values, over the same time, reached a high of 7.9 percent annual growth in April 2014, with growth slowing to a pace of 4.9 percent by April 2016.

For all the talk of income inequality these days, it is America’s wealth inequality – which includes assets like a person’s home – that is perhaps most striking. The gap between the rich and poor in the U.S. was already wide prior to the Great Recession, and the housing bust and foreclosure crisis that followed only made it worse.

Those wealthier Americans better able to cope with the shock of the housing recession and that managed to avoid foreclosure through the worst of it ended up better off and with even more accumulated wealth at the end of the recession in many areas, according to Zillow’s research. At the same time, lower-income Americans that could not avoid foreclosure have missed out on what could have been massive wealth accumulation during the recovery.

Income Inequality

To be sure, income inequality is directly tied to wealth inequality, and both have huge implications for the housing market. Home affordability for low-income Americans looking to purchase even a modest entry-level home has suffered enormously in recent years – especially relative to middle- and high-income buyers looking to buy progressively more expensive homes and particularly in hot markets (figure 1).

Nationwide, a buyer earning a median annual salary in the bottom one-third of all incomes and looking to buy a home valued in the bottom one-third of all homes would need to spend 22.7 percent of their income on a mortgage as of Q2 2015, the latest quarter for which data is available.[1] A buyer earning an income in the top one-third and looking to buy a more expensive top-tier home would only spend 11.5 percent of their income on a mortgage. A year earlier, a U.S. buyer at the top would have had to devote 11.7 percent of their income to a mortgage. At the same time, a bottom-tier buyer would have needed to spend 22.5 percent of their income to a mortgage. So while mortgage affordability at the top has improved somewhat, it has actually gotten a bit worse at the bottom.

The differences are more striking at a local level. At the end of 2012 in San Francisco, for example, a potential low-income buyer looking to buy a bottom-tier home could have expected to pay 42.2 percent of their income on a mortgage payment – a stretch, yes, but probably doable. But by Q2 2015, that same buyer looking to purchase the same level of home should have expected to pay 68.4 percent of their income on a mortgage. Over the same period, the share of income a middle-income buyer purchasing a middle-tier home could expect to spend on a mortgage rose from 29.1 percent to 39.8 percent; and from 22 percent to 29.7 percent for a high-income buyer purchasing a high-end home.

Beyond simply rising home prices, which are countered to some extent by incredibly low mortgage interest rates that help keep monthly payments low, much of this gap is directly attributable to flat or very weak income growth for the lowest-paid workers (figure 2). In real terms (after adjusting for inflation), bottom-third incomes have actually declined over the last 15 years, so a larger share of income has to go toward everyday expenses – which have increased with inflation and now cost more than in the past. And this affordability gap says nothing of the availability gap. In many markets, even for those low-income buyers that can find a way to afford a home, there are simply no homes available to buy in their price range.

Realistically, in many markets nationwide, low-income buyers today are essentially getting shut out of the market thanks to this one-two punch of declining inventory and deteriorating affordability.

Wealth Inequality

But only looking at current income imbalances misses the other half of the story. Housing – for millions the largest single contributor to personal wealth – was greatly distorted during the housing boom and bust. During the housing boom, homeownership rates rose from around 65 percent in 2000 to almost 70 percent by 2006, according to the U.S. Census Bureau. A big driver of this increase was a lot of newly minted, low-income homeowners who invested whatever wealth they did have into down payments and mortgage payments.

And when the bubble popped, less-expensive homes – often bought by low-income homeowners – were more likely to be foreclosed on than higher-end homes. Of all homes foreclosed upon nationwide after December 2006 (the national market reached peak in 2007, but many local markets entered the bust portion of the housing bubble much earlier), 46.7 percent were in the bottom-third of all homes in terms of value, compared to only 16.6 percent of foreclosed homes in the top third. This trend holds in many large markets, including Philadelphia, Detroit, San Francisco, Boston, Seattle and Milwaukee to name just a few (figure 3).

This is perhaps unsurprising. Lower-income homeowners are less likely to be able to absorb financial shocks and life curveballs, including loss of employment or unexpected medical costs. And even if they were able to scrape by and keep making payments on their home for a while, the simple fact that they lived in a lower-priced home to begin with lowered their odds of ultimately avoiding foreclosure.

At the outset of the recession, home values for lower-priced homes fell much more dramatically than higher-priced homes, meaning the owners of these homes were also more likely to fall into deep negative equity. And homeowners in negative equity are more likely to be foreclosed upon – especially those in deep negative equity that might see little point in throwing good money after bad just to stay in a home they may realistically have little to no hope of one day selling for a profit.

Foreclosure does more than strip the title of a home away from a homeowner – it also strips away any and all wealth a homeowner had in the home, both invested up front in the form of a down payment and accumulated over time through home value appreciation and built-up equity. When a homeowner put little or no money down, that wealth may have been small or even non-existent. But for those that made even modest down payments – and depending on how expensive a market is, a “modest” down payment is still often tens of thousands of dollars – that wealth was wiped out as part of the foreclosure proceedings.

More importantly, though, homeowners foreclosed-upon during the recession never got to realize the sometimes huge increases in their homes’ values during the recovery – and the big gains in wealth that would come with it as home values rise past their initial purchase price. After the national housing market hit bottom, home values started rising quickly again – especially among recently foreclosed, low-tier homes now seen as screaming bargains by investors looking to buy cheap but livable homes and convert them into rentals.

Nationwide, foreclosed homes lost almost 40 percent of their value during the bust, and remain 16 percent below their peak values, despite having risen quite strongly during the recovery (figure 4). The median value of all homes, over the same time, fell roughly 22 percent, and is now 5 percent off peak values. But in some markets, foreclosed home values have recovered all value lost in the recession – and then some. In Denver, for example, foreclosed home values fell by 22 percent, but have since grown by 75 percent since home values bottomed out and are now worth almost 40 percent more than they were during bubble peaks.

If foreclosed homeowners had been able to hold on, they would have been able to see their home’s equity – and therefore their wealth – increase. In fact, throughout the entire recovery foreclosed homes showed greater annual appreciation than homes in general, peaking at 12.4 percent in January 2014, and falling to 6.8 percent by April 2016. Overall U.S. home values, over the same time, reached a high of 7.9 percent annual growth in April 2014, with growth slowing to a pace of 4.9 percent by April 2016.

A Source of Anger

There is no small amount of irony in the fact that, after foreclosure, laws prohibited many former homeowners from buying again for seven years, and so millions were forced to rent the exact same kind of homes they had owned only a few years prior. What’s more, these homeowners exchanged the relative stability and predictability of a monthly mortgage payment for the instability of rent – which has been rising steadily for years and is becoming increasingly unaffordable.

And there’s still more salt to throw on the wound with the benefit of hindsight. It’s likely that millions of hardworking Americans found ways to hold on to their homes through the first few years of the recession, only to be foreclosed upon later – which actually turned out worse for them than simply giving the home up in the early years. A homeowner who foreclosed on a home in 2007 would have theoretically been able to buy again in 2014, and may have realized some of the gains in housing of the past few years. But a homeowner that held out desperately only to finally succumb to foreclosure in 2010 or 2011, won’t be able to buy again until 2017 or 2018.

This state of affairs has given rise to much of the social anger and instability we see today. The 99 percent movement, the increasing homelessness issue, the ever-contentious presidential election and a growing housing affordability crisis all have roots in this growing divide between rich and poor. We’ve taken to calling it income inequality, but that only speaks to a small part of the problem. Wealth inequality is incredibly real, is getting worse and is distressingly unheralded. We hope this research helps bring the issue to light.

 

[1]Income data is sourced from the American Community Survey (ACS), indexed forward because the ACS series ends several years ago. For median income used in the overall affordability analysis, we chain the income data forward using the Employment Cost Index (ECI), which is updated quarterly with a one quarter lag. But income tier data is not published in ECI. To get tiers, we rely on the Consumer Expenditure Survey (CES), which is published with a one-year lag, which is why our tier data is only available through July 2015 but our overall affordability is available through Q1 2016.

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Housing Highs & Lows: How the Home Affordability Gap Between the Rich and Poor is Widening

  • American home buyers making the country’s national median income and buying the median-valued U.S. home could expect to pay 14.8 percent of their income on a mortgage as of Q1 – down slightly from 15.1 percent at the end of 2015, and well below the historic U.S. average of 21.2 percent.
  • Renters making the U.S. median income and looking to rent the typical rental home nationwide should expect to devote 30.1 percent of their income to rent as of Q1, up from 29.8 percent at the end of 2015 and well above historic norms of 25.8 percent.
  • Buyers in the lowest income tier should expect to spend roughly twice as much of their income on a mortgage payment for an entry-level home as buyers in the highest income tier buying a more expensive home.

Buying a home with a mortgage got slightly more affordable to start of the year, especially compared to renting. But while mortgage affordability overall has improved somewhat, for low-income Americans looking to buy even a modest home, affordability has actually gotten worse – at the same time as it improved for those earning more.

As of the end of the first quarter, the typical American home buyer making the country’s national median income and buying the median-valued U.S. home could expect to pay 14.8 percent of their income on a mortgage. That’s down slightly from 15.1 percent at the end of 2015, and well below the historic U.S. average of 21.2 percent (figure 1).

In general, the Midwest is home to the most affordable markets, with eight of the 10 most affordable large markets located in the region. The most affordable large markets nationwide in Q1 – where the typical mortgage consumed the smallest share of income – were Detroit (9.8 percent), Pittsburgh (10.4 percent) and Indianapolis (10.5 percent). Unlike the Midwest, California is far less affordable – overall, six of the nation’s 10 least affordable markets in Q1 were in California. The three least affordable large markets were San Jose (41.9 percent of the area’s median income is needed to afford a typical mortgage payment), San Francisco (40.5 percent) and Los Angeles (39.1 percent).

Those same three California markets also hold the dubious distinction of being the only large metro markets where a typical mortgage today is less affordable than it was historically. Bay Area residents in the San Jose and San Francisco metros can expect to spend 6.1 and 2.0 percentage points more of their income to a mortgage today, respectively. Los Angeles home buyers today should expect to devote 3.2 percentage points more of their income to a mortgage compared to prior generations.

In every other large market nationwide and the nation as a whole, the share of income currently necessary to afford a typical mortgage is less than it was historically – painting a picture of a broader housing market that, despite some ills, remains stable and affordable.

But looking at different segments of the market reveals a much different picture.

Affordability Tears

Depending on a given buyer’s income level and the kind of home they’re trying to buy, affordability can vary dramatically. Nationwide, a buyer earning a median annual salary in the bottom one-third of all incomes and looking to buy a home valued in the bottom one-third of all homes would need to spend 22.7 percent of their income on a mortgage as of Q2 2015, the latest quarter for which data is available.[1] A buyer earning an income in the top one-third and looking to buy a more expensive top-tier home would only spend 11.5 percent of their income on a mortgage (figure 2).

A year earlier, in Q2 2014, a U.S. buyer at the top would have had to devote 11.7 percent of their income to a mortgage. At the same time, a bottom-tier buyer would have needed to spend 22.5 percent of their income to a mortgage. So while mortgage affordability at the top has improved somewhat, it has actually gotten a bit worse at the bottom.

The reasons why mortgage affordability has suffered at the bottom at the same time as it has improved at the top comes back to two basic inputs used to determine affordability: Income and home price. Growth or contraction in either will lead to changes in affordability. And incomes at the top are growing more quickly than incomes at the bottom, while bottom-tier home values appreciate faster than those at the top-tier. Between Q2 2014 and Q2 2015, bottom-tier incomes grew 2.5 percent, compared to top-tier income growth of 3.5 percent (figure 3). Over the same period, bottom-tier home values increased 6.1 percent, versus 4.1 percent for top-tier homes (figure 4). Essentially, bottom-tier home values grew more than twice as fast as bottom-tier incomes, while top-tier incomes and home values grew at similar paces.

Points of Interest

Still, in both cases, home values grew more quickly than incomes, which should in theory have caused affordability to deteriorate to some extent across the board – and much more than it actually did at the bottom tier. But the reason top-tier affordability actually improved and bottom-tier affordability only suffered marginally comes down to the third main factor in affordability: Mortgage interest rates.

Figure 5 US Mortgage RateAfter the housing market hit bottom in early 2012 and the economy began picking up steam, most economists predicted that mortgage interest rates would begin to rise from the historic lows reached during the recession. But a series of global political, economic and security-related events have, instead, conspired to help keep mortgage interest rates low – and given continued instability around the globe, it’s likely rates will stay low for a while (figure 5).

Low mortgage rates are a boon for home buyers, allowing them to borrow more money but pay less for it in interest charges each month. In other words, low mortgage interest rates are masking what could be a much worse affordability situation given rapid home value growth and anemic income growth. If and when mortgage interest rates begin rising again in earnest, many pricey markets could be in for a rude awakening.

Which isn’t to say there aren’t currently some markets where affordability, especially for those at the bottom-end, is already nightmarish. Most financial experts advise spending no more than one third of income on housing costs. But as of Q2 2015, bottom-tier buyers in four (probably unsurprising) large markets could expect to pay much more than half of their income to a mortgage on an entry-level home: Los Angeles (76.1 percent of bottom-tier income needed to afford an entry-level home), San Jose (71.2 percent), San Francisco (68.4 percent) and San Diego (59.7 percent). Rounding out the top five – or bottom five, depending how you look at it – least affordable markets for entry-level buyers is New York (48 percent).Table

No Rent Concessions

Not to be lost in all this discussion of mortgage affordability are the roughly one-third of American households that rent their home. And for them, the affordability situation is plain bad – and getting worse.

As of the end of Q1, renters making the U.S. median income and looking to rent the typical rental home nationwide should expect to devote 30.1 percent of their income to rent, up from 29.8 percent at the end of 2015 and 29.6 percent a year ago and well above historic norms of 25.8 percent. Of the 35 largest metro markets nationwide included in this analysis, rental affordability today is worse than it was historically in all but two – Pittsburgh (24.8 percent currently vs 28.3 percent historically) and Sacramento (31.2 percent vs 31.7 percent).

Nationwide, the least affordable large rental markets include Los Angeles (47.6 percent of income needed to afford the typical rental home), San Francisco (46 percent) and Miami (43.9 percent). The most affordable rental markets in Q1 2016 included St. Louis (23.6 percent), Pittsburgh (24.8 percent) and Detroit (25.1 percent).

Methodology

To calculate mortgage affordability, we first calculate the mortgage payment for the median-valued home in a metropolitan area by using the metro-level Zillow Home Value Index for a given quarter and the 30-year fixed mortgage interest rate during that time period, provided by the Freddie Mac Primary Mortgage Market Survey (based on a 20 percent down payment). Then, we consider what portion of the monthly median household income (U.S. Census) goes toward this monthly mortgage payment. Median household income is available with a lag. For quarters where median income is not available from the U.S. Census Bureau, we calculate future quarters of median household income by estimating it using the Bureau of Labor Statistics’ Employment Cost Index.

The affordability forecast is calculated similarly to the current affordability index but uses the one year Zillow Home Value Forecast instead of the current Zillow Home Value Index and a specified interest rate in lieu of PMMS. It also assumes a 20 percent down payment.

We calculate rent affordability similarly to mortgage affordability; however we use the Zillow Rent Index, which tracks the monthly median rent in particular geographical regions, to capture rental prices.

In order to calculate affordability for low-income households, we use census data to calculate the median income of households in the bottom third of income. We then assume that they purchase the median bottom-tier home. At Zillow we define a bottom-tier home to be a home in the bottom third of home values in their metro. We then calculate what percentage of monthly income a household would have to spend to pay the mortgage. A similar process is done with the middle and top thirds of the home value and income distributions to produce a middle-income and high-income affordability.

 

 

[1]Income data is sourced from the American Community Survey (ACS), indexed forward because the ACS series ends several years ago. For median income used in the overall affordability analysis, we chain the income data forward using the Employment Cost Index (ECI), which is updated quarterly with a one quarter lag. But income tier data is not published in ECI. To get tiers, we rely on the Consumer Expenditure Survey (CES), which is published with a one-year lag, which is why our tier data is only available through June 2015 but our overall affordability is available through Q1 2016.

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Negative Equity Falling Faster Among Less-Expensive Homes

  • The overall negative equity rate among bottom-tier homes nationwide was 21.8 percent in Q1, compared to 7.3 percent among top-tier homes, 11.4 percent for middle-tier homes and 12.7 percent for all U.S. homes.
  • The negative equity rate among bottom-tier homes has fallen 3.7 percentage points in the past year. Middle-tier negative equity has fallen by 2.7 percentage points and top-tier negative equity has fallen by 1 percentage point. Over the same period, the negative equity rate among all U.S. homes fell 2.7 percentage points.

Owners of the east-expensive homes were roughly three times more likely to be underwater on their mortgage than owners of the most-expensive homes in markets nationwide as of the end of Q1 2016. But the negative equity rate for those less-expensive, entry-level homes has fallen faster over the past year than for middle- and top-tier homes as entry-level home value appreciation picked up.

Figure 1 US NE Time SeriesThe overall negative equity rate among bottom-tier homes nationwide was 21.8 percent in Q1, compared to 7.3 percent among top-tier homes, 11.4 percent for middle-tier homes and 12.7 percent for all U.S. homes (Figure 1). Among the 35 largest metros, Detroit (43.9 percent), Cleveland (37.7 percent) and Atlanta (37.1 percent) had the highest share of bottom-tier homes in negative equity in Q1.

That the bottom third of the market was hit disproportionately hard by negative equity, and has been slow to recover, is not exactly a new story. But comparing negative by tiers over time reveals a somewhat different, if not exactly surprising, story: Over the past year, negative equity in the bottom tier has been receding more quickly than other tiers. And in some markets, much more quickly.

As of Q1 2015, the bottom-tier negative equity rate stood at 25.5 percent, compared to 8.3 percent at the top and 14.1 percent for the middle. In other words, the negative equity rate among bottom-tier homes has fallen 3.7 percentage points in the past year. Middle-tier negative equity has fallen by 2.7 percentage points and top-tier negative equity has fallen by 1 percentage point. Over the same period, the negative equity rate among all U.S. homes fell 2.7 percentage points.

In Seattle, bottom-tier negative equity fell 9.2 percentage points from Q1 2015 to Q1 2016 (23.8 percent to 14.7 percent), compared to just a 1 percentage point drop among top-tier Seattle homes (5.69 percent to 4.64 percent) – the largest such difference among big U.S. metros. In Columbus, bottom-tier negative equity fell 8.8 percentage points, compared to 1.2 points at the top. The bottom-tier negative equity rate in Atlanta fell 8.9 points, compared to just 2.1 points among top-tier homes (Figure 2). Figure 2 NE by Tiers

There’s a few reasons for this trend, not the least of which is that negative equity in the bottom tier simply has farther to fall compared to already-low levels of negative equity at the top. But the most obvious reason behind the different speeds at which negative equity is falling among different home value tiers boils down to simple differences in home value growth. Growing home values means shrinking negative equity. And while home values have grown across the board fairly consistently since the housing market hit bottom in early 2012, over the past year bottom-tier home values have grown much faster, in most markets, than top-tier values and home values overall. Between Q1 2015 and Q1 2016, bottom-tier median home values grew 7.6 percent. Over the same period, top-tier median home values grew 4.3 percent.

In the long-run, this combination of faster home value growth and more quickly receding negative equity at the bottom end of the market should prove to be a positive. It’s true that rapid appreciation on its own at the bottom end may price some entry-level buyers out of the market before they even have a chance to get in.

But for owners of bottom-tier homes, this rapid appreciation is a boon, especially if they’re underwater. And a big reason why appreciation is so rapid at the bottom is precisely because so few homes are available for sale in part because so many are locked in negative equity. If this fast growth continues, it’s more likely bottom-tier underwater owners will be able to get back into positive equity more quickly (assuming they’re not too far deep underwater to begin with). For buyers, this means it’s more likely they’ll be able to find a home to buy as more previously underwater owners re-surface and begin to list their homes for sale.

At least, eventually. In the meantime, the slow march back to a balanced market will continue.

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As Rents and Home Values Rise in Many Markets, Is Tech Industry Really to Blame?

  • Housing is more expensive and less affordable in areas where a good share of workers earn high wages – whether in tech, finance, law or any number of other industries typically associated with hefty paychecks.
  • Many of the largest metros today with a large concentration of tech workers were once areas with solid high-earning, non-tech employment, making them more expensive and exacerbating the affordability crisis often blamed on tech in these metros.

Across the country, many Americans are feeling the burden of rising home values and rents. And all too often, we play the blame game. Ask anyone in the San Francisco, Seattle, Denver or New York markets, and they will likely point towards the tech industry as making their hometown unaffordable.

But is that fair? To a degree, yes – rents and home values have risen and affordability has generally suffered in areas with a large share[1] of tech workers.[2] But it’s not a tech-specific problem, nor is it a new problem: It’s an issue that has persisted now for at least fifteen years.

There is certainly a reason that many people associate the tech industry with pricey and unaffordable housing. In metropolitan areas with a large share of tech workers, rents and home values are considerably higher. But the reality is that expensive housing often follows in areas where a good share of individuals are earning high wages – whether they work in tech, finance, law, or any number of other industries associated with hefty paychecks (figure 1).

Figure 1 RentsOn average, rents are $430 higher in metropolitan areas with a large concentration of tech workers, causing the typical renter in these areas to shell out 30.5 percent of their income towards rent each month, compared to only 19.7 percent in areas where tech is less prevalent. A similar – and stronger – result holds when comparing areas with a large share of high-earning, non-tech workers. Rents in those areas are $580 more expensive per month, on average, than in areas where there are not many high-earning jobs. This means renters in these areas spend an additional 11.1 percent of their income on rent each month relative to their counterparts living in metros with only a small handful of high-income positions.

Similarly, homes are more expensive and mortgage payments are less affordable when tech or other high-earning workers make up a large share of employment in a given area (figure 2). The effect is again slightly bigger for areas with a denser concentration of high-earning, non-tech workers. In 2015, the typical home in metros nationwide with a large subset of tech workers was worth $255,100, compared to only $143,000 for those areas with fewer techies, a gap of $112,100. In metros with a high concentration of high-earning, non-tech employees, homes were valued $133,900 more than homes in areas with a lower concentration.

Figure 2 Home ValuesWhile incomes have a tendency to be higher in places where there is abundant tech or other high-income employment, the larger salaries are not enough to offset the high cost of housing; owning a home is still less affordable, as the typical resident in these places spends a large percent of his income on mortgage payments each month. These results hold if we exclude areas with large concentrations of both tech and other high-earning non-tech industries, or if we restrict the analysis to a subset of smaller metros.[3]

Although these results hold regardless of how we slice the data (see footnote), one might wonder about the interaction between employment changes in tech and other high-earning industries. In particular, it could be argued that tech has created a need for more high-earning, non-tech jobs, as tech companies and their employees often hire financial analysts, accountants, lawyers, higher-priced doctors, etc. This, in turn, could drive up housing costs further and make certain metros even more unaffordable.

Alternatively, there could be an inverse relationship – perhaps tech employers purposely located in metros that already had a large share of other high-earning industries, either because the industry infrastructure was already present or because these places had other desirable qualities. This is one possible explanation for the employment trends experienced by the New York metro over the past several years.

In reality, it is a combination of the two. Over the past 25 years, the share of workers in high-income, non-tech industries has decreased in many of the top 35 metros, while the share of tech workers has increased (figure 3). This suggests that tech has largely grown in areas that previously had healthy employment in high-earning industries. Given that areas with solid high-earning, non-tech employment generally are more expensive, this may contribute further to the affordability crisis often blamed on tech in these metros.

Washington, D.C., for example, has long been a high-earning, non-tech-industry haven. In 1990, 21.3 percent of the Greater D.C. metro area’s working population earned high wages in finance, marketing, consulting services and public relations, while just 1.8 percent of workers earned their living working in tech. Fast-forward to 2015, and tech employment has increased 60 percent while high-earning, non-tech employment has decreased 7.1 percentage-points.

While this trend holds true for most of the top 35 metros, three obvious exceptions are San Jose, San Francisco and Seattle. In these areas, employment in both tech and other high-earning industries have increased significantly, indicating that perhaps some of the tech growth has led or happened alongside more high-earning non-tech growth as well. The compounding effect of gains in both tech and other high-earning employment may be one of many reasons that housing has grown increasingly unaffordable in these areas.

Residents across these metros are experiencing some of the true growing pains associated with such strong economies – their cities are becoming increasingly unaffordable. The burden likely weighs heavy on life-long residents (who have seen the cost of living rise) and on the subset of workers whose wages have remained relatively stagnant over the past ten years. While this is not fair, we cannot vilify one industry for making our beloved cities expensive. It really just comes down to strong job growth overall, particularly in those industries that pay well.

 

[1] “Large share” (“small share”) indicates that the share of total employment in a given industry is above (below) the national average for that industry.

[2] We define tech workers as individuals who work in the computer-related subset of the high technology industry. For a full list of industries included in this classification or for more details, please visit the Bureau of Labor Statistics: http://www.bls.gov/opub/mlr/2005/07/art6full.pdf.

[3] Home values and rents are more expensive (and rents and mortgages are less affordable) even when we restrict the analysis to subsets of all the metropolitan areas, indicating that the overarching results are not driven by the larger metropolitan areas or geographic differences in housing costs and incomes. Similarly, restricting the analysis to areas that have a disproportionately large share of tech employment (large share of high-earning, non-tech employment) and no high-earning, non-tech employment (no tech employment) does not change the overall results, though the magnitude is muted slightly. This indicates that these findings are not an artifact of high-earning, non-tech jobs frequently being located in areas with a strong tech presence. Further, these results hold over the past fifteen years.

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All Ages Welcome: Why Living Alone Isn’t Just for America’s Young and Old Anymore

  • Once relegated to the beginning and end of their adult lives, more middle-aged Americans are living alone than ever before.
  • Young adults are no more or less likely to live alone today than a generation ago, with the possible exception of young women in their mid-20s.
  • Growth in the number of Americans living alone has been driven by more divorcees, partially offset by fewer widows.

After increasing steadily for decades, the share of Americans living alone has been essentially stable over the past five years or so, and has only recently begun to tick up again.

Figure 1 Adults Living AloneAs of the end of 2015, almost 15 percent of U.S. adults lived alone, up from less than 11 percent in 1976 (figure 1) but roughly flat from highs reached during the middle years of last decade, according to a Zillow analysis of U.S. Census data.[1] Historically, Americans tend to live alone toward the beginnings and ends of their adult lives. For young adults gaining their first taste of autonomy, living alone is a hallmark of independence. For those nearing the end of their lives, living alone is likely more ambivalent – a sign that many have outlived their loved ones.

Figure 2 Share Living Along by Age, Sex, YearFor the most part, young adults are no more or less likely to live alone today than they were a generation ago. Rather, the increase in the share of Americans living alone over the past 40 years has been driven by middle-aged adults (figure 2). Which isn’t to say there aren’t some exceptions. Although the change is very small, young women in their mid-twenties are slightly more likely to live alone today: 10 percent of 25- and 26-year-old women currently live alone, compared to roughly 7 percent to 8 percent a generation ago (figure 2, point a).

The share of elderly men aged 70-and-up who live alone has been essentially stable over time, but the share of men living alone aged 30-to-69 has increased, particularly since 2010 among men in their late 50s and early 60s (figure 2, point b). A generation ago, the share of men living alone tended to peak around age 28-29 before declining steadily through their mid-40s most likely as they married and started families. The share then began increasing again, likely because of divorce and/or children reaching adulthood. But by the 1990s, this trend had essentially disappeared. The share of men living alone now increases through their 20s and then remains steady through their mid-40s before rising again (figure 2, point c).

Women in their 60s and older are less likely to live alone today than in the past: The share of women aged 78 or older living alone has been steadily declining, from 53 percent during the late 1970s to 41 percent by the mid-2010s (figure 2, point d). Still, toward the end of their lives, women are twice as likely as men to live alone. The share of middle-aged women living alone has been essentially steady since the 1980s.

 

 

Men and women are equally likely to live alone through roughly age 24-25, when men become more likely to live alone. This reverses by their mid-50s, when the proportion of women living along starts to increase rapidly while the share of men living alone stabilizes (figure 3).

Figure 3 Share Living Alone by Age, Year, Sex

Since the mid-1990s, divorcees have accounted for the largest share of Americans living alone, but there are sharp differences between men and women (figure 4). The single/never-married crowd accounts for the largest component of men living alone; widowers have been steadily declining as a share of men who live alone. Widows account for a plurality of women who live alone, although their share has been steadily declining, while divorcees and single/never-married women are steadily increasing in share.

Figure 4 Marital Status

 

[1] This analysis relies on the March Supplement to the U.S. Census Bureau’s Current Population Survey (CPS). Data from the annual American Community Survey (ACS), which includes a larger sample of the American population, show the share of U.S. adults living alone falling somewhat over the past decade. However, we chose to focus on CPS data given its longer time series: CPS data for these metrics are available since 1976 while ACS data are only available since 2005.

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A Crack in the Code: Why Even Some Tech-Employed Renters Can’t Find Affordable Housing

  • The average tech employee that rents spends 18 percent of their income on rent, compared to 24 percent for average non-tech-worker renter households.
  • But there’s large variance across the field of tech when it comes to how much tech workers spend on rent.
  • Nationwide, 25 percent of tech-worker renters earn less than $44,000 per year. At the high end, 25 percent of tech-worker renters earn more than $92,000 annually.

An analysis of the salaries earned and housing costs paid by tech workers nationwide can teach us valuable lessons about the dangers of making broad assumptions based on averages.

The average U.S. tech-employed renter is doing pretty well for himself.[1] He’s spending only 18 percent of his income on rent, compared to 24 percent for the average renter nationwide.[2] That means he has more disposable income and/or extra savings for things like an emergency medical payment or a down payment on a home if/when he decides to buy one. And this isn’t just a broad, national trend – every one of the largest metro areas analyzed nationwide shows a similar trend (figure 1).

Tech_NonTech_AffordabilityGap_1But don’t make the mistake of conflating the average tech renter with all tech renters. Across the wide (and growing) field of tech careers,[3] there’s a substantial spread in the chunk of their paychecks tech renters sign over to their landlords each month. Comparing rent affordability for tech workers in the 25th percentile to the 75th percentile demonstrates this spread (figure 2).

TechRenter_25-75_Percentile_2In the U.S. as a whole, 25 percent of tech renters are spending 13 percent or less of their income on rent. At the other end of the spectrum, 25 percent of tech renters are spending 25 percent or more of their income on rent. Every large metro analyzed shows a similar pattern: A 10-to-15 percentage point gap between the most-rent-burdened and least-rent-burdened tech renters. And in almost every top market, the rent affordability gap between the 25th and 75th percentile is larger than the gap between the average tech-employed and non-tech-employed worker.

What’s driving the gap? Incomes are the obvious answer. If you think every tech worker is doing well for themselves, think again (figure 3).

TechRenter_Incomes_3Nationwide, the 25th percentile tech-employed renter brought home $44,000 per year in 2014. In San Francisco, the 25th percentile tech-employed renter earned $65,000 in 2014. Assuming that San Franciscan, tech-employed renter wants to spend no more than 30 percent of their income on rent (the share-of-income-spent-on-housing threshold most prudent advisors recommend staying below), they would have roughly $1,600 to spend on rent per month.

Want to see a magic trick? Watch as San Francisco’s rental stock available at that price range disappears right before your eyes!

sf1600_fasterIt doesn’t get much better if that 25th percentile tech-employed renter in San Francisco is looking for a larger apartment to share with a roommate. Two-bedrooms in the $3,200/month range are almost equally hard to find.

And the earlier reference to the average tech worker as male wasn’t accidental or meant to be insensitive. Not only are women underrepresented in the field of tech (just 25% of all tech workers nationwide are female), but women are also twice as likely to be in the lowest quartile of the tech-renter salary distribution as in the top quartile. The same goes for both black and Hispanic tech renters.

Just because the average tech-employed renter is doing OK, we shouldn’t think everyone in the field is having an easy time making ends meet.

 

[1] Wait for it…

[2] The data for this analysis comes from the 2014 American Community Survey. Microdata provided by IPUMS through the University of Minnesota. Affordability calculations are computed at the household-level. Salary calculations are done at the person-level.

[3] To determine tech careers we pooled 14 occupation codes from ACS. 0110, 1005, 1006, 1107, 1106, 1007, 1030, 1050, 1010, 1020, 1060, 1105, 1400, and 7900.

 

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May 2016 Market Report: Bottom-Tier Volatility and Top-Tier Stability Reveals A Tale of Two Markets

  • Entry-level home values rose twice as fast (8 percent) over the past year as top-tier home values.
  • The number of expensive homes for sale has remained steady, but there are fewer entry-level homes on the market.
  • Nationally, home values rose 5.4 percent over the past year, to a median home value of $186,100. Rents rose 2.9 percent to a Zillow Rent Index[i] of $1,407.

Rapid and accelerating growth in entry-level U.S. home values, and the affordability squeeze it’s causing for the market’s core, has gained a lot of attention lately. But flying largely under the radar has been an almost year-and-a-half-long stabilization in home value growth among top-tier U.S. homes.

May 2016_01 US ZHVI TiersThe median U.S. home value in May rose to $186,100, according to the Zillow Home Value Index, up 5.4 percent year-over-year and 0.5 percent from April. The typical entry-level home was worth $104,600 in May and the median top-tier home was worth $340,100. Home values among entry-level homes have grown almost twice as fast over the past year as home values among top-tier homes – 7.9 percent compared to 4 percent, respectively (figure 1).

And while annual home value growth among bottom-tier homes nationwide has been faster than the month prior in 12 of the past 14 months, home value growth among top-tier homes has been remarkably constant over the past roughly year-and-a-half. After peaking at 7.3 percent annual growth in early 2014 and steadily slowing down each month for a year after, U.S. top-tier home values have grown at a 4 percent to 4.3 percent year-over-year pace in every month since January 2015 (figure 2).

02 US ZHVI YoYThis trend is echoed in a majority of large markets nationwide. Top-tier home value growth is slowest among all three tiers in 25 of the top 35 markets where home value appreciation data for all three tiers is available. Still, higher-end homes are appreciating more quickly than entry-level homes in pockets of the country, including large markets in the Northeast, West and Midwest. Notable metro markets where annual top-tier home value growth is outpacing bottom-tier growth include New York, Los Angeles, Boston, Seattle, St. Louis and Cleveland.

 

 

It’s tough to pin down one exact reason for this stability at the top, even as the bottom and middle segments of the market continue to accelerate. Instead, it’s very likely the result of several factors. The inventory of low- and middle-tier homes for sale fell by 8.9 percent and 9.7 percent, respectively, in May compared to a year ago. Top-tier inventory, over the same period, fell a scant 0.5 percent.

Nationwide in May, less than a quarter (24.6 percent) of all homes for sale were entry-level, bottom-tier homes. On the flip side, almost half (47.5 percent) of all U.S. homes for sale in May were in the top tier. This lack of inventory at the bottom end, combined with high demand from the young families and renters-turned-home buyers that are most likely to seek an entry-level home, helps to push up prices more quickly for those bottom-tier homes that are available. Yes, there is ample-enough demand for higher-end homes to push up home values in that segment at a healthy pace, but that demand simply doesn’t match the clamor for homes at lower price points.

We’ve also been hearing for some time that home builders, who help add to supply when inventory of existing homes for sale is tight, have been more focused on building larger, more expensive homes rather than smaller, more entry-level homes. This additional supply at the high end can also contribute to stability there, even as growth at the low end speeds up.

Regardless of the precise reasons why the top is stable while the bottom is hot, the stark difference between the top and bottom of the housing market sheds light on the two very different experiences home buyers will face this summer in most markets. Buyers looking for the most expensive homes will find more options and less competition. It’s a much different story for entry-level buyers, who will be up against rising prices, low inventory and tough competition, with homes selling over asking price in many of the nation’s hottest housing markets.

Don’t Forget Rising Rents

03 US ZRIThe U.S. median rent in May was $1,407 per month (figure 3), up 0.3 percent from April and 2.9 percent from May 2015, according to the Zillow Rent Index.

U.S. rents have grown year-over-year for 45 consecutive months (figure 4). But while rents overall have continued to grow for almost four straight years, the pace of annual growth has fallen in recent months. After peaking at 6.6 percent annual growth in July of last year, annual growth has slowed in nine of the 10 months since when compared to the month prior. And this slowdown has been particularly dramatic lately on luxury apartment rents in higher-end ZIP codes in many markets nationwide. A direct, three-tier-based, metro-metro comparison with home value growth is unavailable, but the similarities between the relatively slow growth of top-tier home values and upper-echelon rents is notable.

04 US ZRI YoYMedian rents in all of the nation’s 35 largest metro markets grew year-over-year to some extent in May. Rents grew fastest year-over-year in the Portland (up 9.4 percent from May 2015), Seattle (up 9.1 percent) and San Francisco (up 8.4 percent) metros.

 

 

 

 

 

 

Outlook

Looking ahead, Zillow expects national home values to continue growing, rising another 3.1 percent through May 2017 to a Zillow Home Value Index of $191,800. U.S. rents are also expected to keep growing over the next year, at a 3.2 percent pace through May 2017 to a Zillow Rent Index of $1,452.

The top of the market is starting to stabilize, and people are beginning to take notice. Buyers looking for entry-level homes are having bidding wars in many markets, while it’s not uncommon for high priced homes to stay on the market a few months longer. The housing market is much more forgiving for current homeowners looking to move into a bigger, more expensive home. These buyers can be a bit more selective, and may even get a good deal.

[i] The Zillow Rent Index (ZRI) is the median Rent Zestimate® (estimated monthly rental price) for a given geographic area on a given day, and includes the value of all single-family residences, condominiums, cooperatives and apartments in Zillow’s database, regardless of whether they are currently listed for rent. It is expressed in dollars.

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Key Takeaways from the May New Home Sales Report

  • May new home sales fell 6 percent from April to 551,000 units (SAAR), according to the Census Bureau.
  • April home sales were revised downward from 619,000 units to 586,000 units (SAAR) and March sales were revised down from 531,000 units to 522,000 units (SAAR). Instead of surging 16.6 percent as initially reported, new home sales increased 12.3 percent in April.
  • Inventory of new homes for sale continued to gradually ease, growing 1.2 percent over the month.
  • The median price of new homes sold fell 9.6 percent from April to $290,100, retreating from an all-time high to a 12-month low in May.

May new home sales fell 6 percent from April, to 551,000 units at a seasonally adjusted annual rate (SAAR), in line with expectations (figure 1). Compared to a year ago, May new home sales were up 8.7 percent.

April new home sales were revised downward from an initially reported 619,000 units to 586,000 units. Rather than increasing at a record monthly pace of 16.6 percent in April as first reported, revised data suggest that home sales increased by 12.3 percent in April – in line with recent trends. March home sales were also revised lower.

New-Home-Sales-Key-TakeawaysMay’s month-over-month slowdown was most prominent in the Northeast and West. In the Northeast, new home sales surged 41.7 percent in April but fell 33.3 percent in May (off of very low numbers). In the West, new home sales increased 19.5 percent in April only to fall 15.65 percent in May. The Midwest bucked the national trend, falling 4.6 percent in April from March but rising 12.9 percent in May over April. Over the year, May new home sales were up 30.8 percent in the Northeast (again, off of low numbers), up 16.7 percent in the Midwest, up 13.3 percent in the South and down 8.8 percent in the West. During mid-2015, new home sales were consistently stronger in the West than elsewhere in the nation, though the region now appears to be lagging.

Inventory of new homes continued to ease gradually in May, with the number of new homes for sale growing 1.2 percent from April to 244,000 units (SAAR). Compared to last year, the number of new homes on the market in May was up 16.2 percent, or roughly 34,000 homes.

After hitting a new all-time high in April, the median seasonally-adjusted price of new homes sold retreated to a 12-month low in May, falling 9.6 percent from April to $290,100. The median price of new homes sold in May was 1.05 percent above the median sale price recorded in May 2015.

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