Tuesday, 22 of January of 2019

Economics. Explained.  

New Home Sales

November 28, 2018

New home sales plunged 8.0% in October after having risen 1.0% in September (You will recall that a month ago home sales for September were initially reported as dropping 5.5%.  After revision they are now up 1.0%.  Hence, these figures are always subject to significant revision.)  Having said that, sales have fallen in our of the past five  months.  The October drop was broad-based by region.  New home sales are 12.0% below their year ago level.  So is the  problem caused by a lack of demand, a supply constraint, or some of both.  We believe it is both.

First, the demand side.  The National Association of Realtors publishes a series on housing affordability for existing homes which stands at about 145.0.   That means that consumers have 45.0% more income than is necessary to purchase a median priced existing 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.  But at the peak of the previous expansion back in 2007 this affordability index stood at about 115.  Thus, existing homes are less affordable than they were, but they remain relatively affordable and should continue to be affordable for some time to come.

New homes are considerably less affordable.  That is because a median-priced new home costs about $60,000 more than a median-priced existing home.  As a result, the down payment required is about $12,000 higher and the monthly payment $300 per month higher than for an existing home.  Using the same construction as the series described above, the index stands at 119 which means that consumer have just 19% more income than required to  purchase a median-priced new home (vs. 45% for an existing  home).  At the peak of the previous business cycle consumers had just 3% more income than required.  Thus, it seems that new homes are becoming unaffordable.

However, we would have thought that if the new home sales were weakening by any significant amount, traffic through builders’ model homes would be dropping off.  It has dropped a little, but builders are still reporting traffic through the model homes that is relatively robust.  NAHB Chairman Randy Noel said, “Builders report that they continue to see signs of consumer demand for new homes, but that customers are taking a pause due to concerns over rising interest rates and home prices.”

Now the supply side.  The supply of available homes for sale rose 14 thousand in October to 336 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 0.9 month in October to 7.4 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.  So, at least in October, there was an adequate supply of homes available for sales.

However, one interesting point to note is that most of the increase in the number of homes available for sale was for homes either under construction or not yet started.  The supply of completed homes available for sale is a record low 2.7 months.  Thus, the potential new home buyer still has a hard time finding a model he can purchase right away.  Builders need to step up the pace of construction so that consumers can find a specific model to their liking.

But 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 to step up the pace of construction, but it is difficult for them to do so given the scarcity of workers.

New home prices fell 3.6% in October to $309,700 after having fallen 0.8% in September.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $318,300.  During the course of this past year prices have fallen 1.1%.

We do not 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 2019.  We expect the sales pace to rise 4.0% next year to 605 thousand.  Mortgage rates should end 2018 at 4.9% and climb to 5.4% by the end of 2019 which is still quite affordable.

Stephen Slifer


Charleston, SC

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