New Home Sales
January 26, 2017
New home sales fell 10.4% in December to 536 thousand, but that follows increases in each of the previous three months. This is typically an extremely volatile. A much better representation of the pace of home sales is the 3-month average which stands at 568 thousand (shown above) which remains close to the highest level thus far in the business cycle. 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 10 thousand in December to 259 thousand. The small increase in inventories combined with the drop in sales means that there is now a 5.8 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 is 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 160.9. That means that consumers have 60.9% 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 4.2% We have made an attempt to estimate affordability if 30-year mortgage rates climb to 4.5% by the end of this year. We estimate the affordability index at that time will be about 154 — 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 rose 4.3 in December to $322,500. Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $311,200. During the course of this past year prices have risen 2.1%.
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, builders will continue to boost production, but prices should rise slowly. Mortgage rates should end 2017 at 4.5% which is still quite affordable.