Implications: Existing home sales surged in November, rising for the third consecutive month to their fastest sales pace since 2006. Sales of previously-owned homes increased 5.6% in November to a 5.81 million annual rate and are now up 3.8% from a year ago. Notably, activity has continued to pick up over the past three months despite the impacts of Hurricanes Harvey and Irma, which prevented many people from searching for homes and put downward pressure on the number of closings. Now that the effects of the hurricanes have mostly subsided there may be some pent-up demand providing a tailwind to sales going forward. That said, the major headwind for sales has been the decline in inventories, which have now fallen on a year-over-year basis for 30 consecutive months and are down 9.7% from a year ago. The number of existing homes for sale declined 7.2% in November to 1.67 million. Paired with the rising pace of sales, this pushed the months' supply of existing homes – how long it would take to sell the current inventory at the most recent sales pace – to 3.4 months in November, down from 4.0 months a year ago, and the lowest since at least 1999. According to the NAR, anything less than 5.0 months is considered tight supply, a benchmark which hasn't been exceeded since November 2015. Despite the lack of options, demand for existing homes has remained remarkably strong, with 44% of homes sold in November remaining on the market for less than a month. Higher demand and a shift in the "mix" of homes sold toward more expensive properties has also driven up median prices, which have now risen for 69 consecutive months on a year-over-year basis. The strongest growth in sales over the past year is heavily skewed towards the most expensive homes, signaling that supply constraints may be disproportionately hitting the lower end of the market. Tough regulations on land use raise the fixed costs of housing, tilting development toward higher-end homes. Although some analysts may be concerned about the impact of tax reform limiting the deductibility of state and local income and property taxes to $10,000 and the principal loan limit on mortgage interest to $750,000, the reality is that few homeowners exceed these thresholds. Instead, what we're likely to see is higher earners and large mortgage borrowers shift toward states with lower taxes and less expensive land. Finally, though mortgage rates may be heading higher, it's important to recognize that rates are still low by historical standards, incomes are growing, and the appetite for homeownership is starting to move higher again.
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