Saturday, 21 of October of 2017

Economics. Explained.  

New Home Sales

September 26, 2017

New home sales declined 3.4% in August to 560 thousand after having fallen 5.5% in July.  The August results were impacted by Hurricane Harvey given that virtually all of the drop occurred in the South.  Sales will rebound in the months ahead.  This is an extremely volatile series under the best of circumstances.  A much better representation of the pace of home sales is the 3-month average which stands at 585 thousand (shown above) which is now well below the peak for the cycle which was 617 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 10 thousand in August to 284 thousand.  The big drop in the number of homes sold combined with a small increase the the number of  homes on the market means that the selling rate is now at 6.1  months.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing are roughly in balance.  But once the sales pace rebounds the month’s supply of homes on the market will once again decline to about 5.5 months.

The National Association of Realtors series on housing affordability for existing homes now stands at about 150.0.   That means that consumers have 50.0% 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 3.9%. We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.2% by the end of this year.  We estimate the affordability index at that time will be about 150 — 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 fell 6.2% in August to $300,300 after having risen 1.1% in July.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $312,100.  During the course of this past year prices have risen 1.9%.

Given that the demand for housing continues to exceed supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace of perhaps 625 thousand by yearend, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2017 at 4.2% which is still quite affordable.

Stephen Slifer


Charleston, SC

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