Sunday, 25 of June of 2017

Economics. Explained.  

New Home Sales

June 23, 2017

New home sales rose 2.9% in May to 610 thousand after having fallen 7.0% in April.  This is typically an extremely volatile series.  A much better representation of the pace of home sales is the 3-month average which stands at 616 thousand (shown above) which is within an eyelash of being the fastest sales pace thus far in the cycle (peak was 616 thousand in March).   Keep in mind that builders are still having difficulty finding an adequate supply of skilled labor.  If they could find more workers, builders would build and sell more homes.  Also do not forget that new home sales are single family homes and do not include sales of condos.

The supply of available homes for sale rose 4 thousand in May to 268 thousand.  The small increase in inventories combined with a similar-sized increase in sales means that there continues to be a 5.3 month supply of new homes available for sale.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing are roughly in balance.

The National Association of Realtors series on housing affordability for existing homes peaked at 214 in January 2013.  It has since slipped from that lofty level and now stands at 156.2.   That means that consumers have 56.2% more income than is necessary to purchase a median priced home.  Existing homes remain quite affordable despite a post-election increase in mortgage rates to 4.0% We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.3% by the end of this year.  We estimate the affordability index at that time will be about 151 — still very affordable.  The reason affordability has not been hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices jumped 11.5% in May to $345,800 after having fallen 3.1% in April.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $325,400.  During the course of this past year prices have risen 5.1%.

Given that the demand for housing far exceeds supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace of perhaps 640 thousand by yearend, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2017 at 4.3% which is still quite affordable.

Stephen Slifer

NumberNomics

Charleston, SC


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