Thursday, 15 of November of 2018

Economics. Explained.  

New Home Sales

October 24, 2018

New home sales plunged 5.5% in September to 580 thousand after having fallen 3.0% in August, 1.5% in July and 6.3% in June.  Sales have fallen four months in a row and in five of the past six months.  And, unlike with existing home sales for September the decline was broad-based by region.  New home sales are 13.8% below their year ago level.  So is it a drop in demand, a drop in supply of available homes for sales, or some of both that is slowing the pace of sales.

First, the demand side.  The National Association of Realtors publishes a series on housing affordability for existing homes which stands at about 140.0.   That means that consumers have 40.0% more income than is necessary to purchase a median priced home.  Thus, existing homes remain quite affordable despite an increase in mortgage rates to 4.9% and an increase in prices.  The reason affordability has not been hit harder by the increase in mortgage rates and prices is because consumer income continues to climb.  Housing, however, is not as affordable as it was a couple of years ago when the consumer had 80-90% more income than was necessary to purchase that median-priced house.   But at the peak of the previous expansion back in 2007 this affordability index stood at about 115.  Thus, housing is less affordable than it was, but it remains relatively affordable and should continue to be affordable for some time to come.

We would have thought that if the housing sector were weakening by any significant amount, traffic through builders’ model homes would be dropping off.  But builders are reporting traffic through the model homes that is still quite robust.

Similarly, if the demand for housing were weakening we would have thought that homes would sit on the market for a longer period of time.  However, homes being offered for sale remained on the market for just 32 days in September which is one of the shortest time periods since the National Association of Realtors began collecting these statistics back in 2011,

Now the supply side.  The supply of available homes for sale rose 9 thousand in September to 327 thousand thousand.  A big drop in the in the number of homes sold combined with a moderate increase in the number of  homes on the market means that the month’s supply of available homes for sale jumped 0.6 month in September to 7.1 months.  Realtors suggest that a 6.0 month supply is that point at which the demand for and supply of housing are roughly in balance.  So, at least in September, there was an adequate supply of homes available for sales.  However, one interesting point to note is that of the 9 thousand increase in the number of homes available for sales 8 thousand was for homes either under construction or not yet started.  The supply of completed homes available for sale is a minuscule 2.9 months.  Thus, the potential new home buyer still has a hard time finding a model he can purchase right away.

At the same time builders say they are having a hard time finding an adequate supply of both skilled and unskilled workers.  Construction employment is rising by about 30 thousand per month.  Builders would like that to be higher.

New home prices rose 0.3% in September to $320,000 after having fallen 3.2% in August.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $323,00000.  During the course of this past year prices have been unchanged.

We refuse to believe that the current level of mortgage rates at 4.9% is high enough to significantly impede the pace of sales.  Thus, we believe the housing sector will continue to do reasonably well in 2018 and 2019.  We expect the sales pace to rise 4.0% next year to 610 thousand.  Mortgage rates should end 2018 at 5.0% and climb to 5.8% by the end of 2019 which is still quite affordable.

Stephen Slifer


Charleston, SC

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