Monday, 24 of September of 2018

Economics. Explained.  

New Home Sales

August 23, 2018

New home sales fell 1.7% in July to 627 thousand after having fallen 2.4% in June.  New  home sales are always very volatile on a month-to-month basis.  Its current level is not too far below that.  Keep in mind that builders are still having difficulty finding an adequate supply of both skilled and unskilled labor.  If they could find more workers, builders would build and sell more homes. At the same time their cost of materials for lumber, copper, and aluminum have been rising which perhaps retards the pace of construction and helps to keep home sales from climbing more rapidly.  Do not forget that new home sales are single family homes and do not include sales of condos.  The housing sector is doing okay, but builder constraints are limiting the supply.

The supply of available homes for sale edged upwards in July to 309 thousand.  That is a shade higher than in other recent months..  This is encouraging and seems to reflect builders’ efforts to boost production.  A decline in the number of homes sold combined with a tiny increase in the number of  homes on the market means that the month’s supply of available homes for sale rose 0.2 month in July to 5.9 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.  This indicator hit the 6.0 month mark a couple of times last year, but has not been above 6.0 since 2011.  If more homes become available, home sales will rise.  You cannot sell what you do not have.

The National Association of Realtors series on housing affordability for existing homes now stands at about 141.0.   That means that consumers have 38.0% 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 4.5%. We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 5.0% by the end of 2018.  We estimate the affordability index at that time will remain at about 140 — still very affordable.  The reason affordability is not hit harder by the increase in mortgage rates is because consumer income continues to climb.  At its peak this affordability index stood at about 115 back in 2007.  Thus, housing remains affordable and should continue to be affordable for some time to come.

New home prices jumped 6.0% in July to $328,700 after having fallen 1.1% in June.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $317,30000.  During the course of this past year prices have fallen 1.0%.

The demand for housing remains hot.  Builders are reporting traffic through the model homes that is basically the highest in more than a decade.

Homes being offered for sale remain on the market for just 27 days which is one of the shortest time periods since the National Association of Realtors began collecting these statistics back in 2011,

Given that the demand for housing continues to exceed supply the housing sector will continue to do well in 2018.  Sales will be at a reasonably robust pace of perhaps 660 thousand by the end of this year, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2018 at 5.0% which is still quite affordable.

Stephen Slifer


Charleston, SC

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