Thursday, 24 of May of 2018

Economics. Explained.  

New Home Sales

May 23, 2018

New home sales declined 1.5% in April to 662 thousand after having jumped 4.0% in February and an additional 2.0% in March.  This series hit a cyclical peak in November at 712 thousand.  New  home sales are always very volatile on a month-to-month basis.  A much better representation of the pace of home sales is the 3-month average which stands at 664 thousand (shown above) which is the fastest 3-month pace of sales thus far in the expansion.   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.  Also do not forget that new home sales are single family homes and do not include sales of condos.  Any way you slice it, the housing sector is expanding nicely.

The supply of available homes for sale edged upwards in April to 300 thousand which is the most homes for sale since March 2009.  That is encouraging and seems to reflect builders’ efforts to boost production.  However, a modest 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 0.1 month to 5.4 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.  The housing shortage persists.

The National Association of Realtors series on housing affordability for existing homes now stands at about 160.0.   That means that consumers have 60.0% 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 4.7% by the end of 2018.  We estimate the affordability index at that time will be about 153 — still very affordable.  The reason affordability is not hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices fell 6.9% in April to $312,400.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $325,700.  During the course of this past year prices have risen 5.0%.

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 700 thousand by the end of this year, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2018 at 4.7% which is still quite affordable.

Stephen Slifer


Charleston, SC

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