Tag Archives: New Home Sales

Reasons to Suspect the US Housing Market is Starting to Coo

Low unemployment doesn’t ensure more Americans can afford a home, and rising home prices say more about target markets than the supply of motivated buyers

AUGUST 8, 2018
2018Housing Slowdown Inventory
Months of supply for existing homes ticked up year-over-year in June for only the second time in three years. Given the number of existing homes for sale has been falling, the uptick in months of supply is likely attributable to a slower pace of sales.
DATA: NATIONAL ASSOCIATION OF REALTORS; GRAPH: CURBED.COM

With housing inventory shortages rampant across the nation, the summer of 2018 was supposed to be “the most competitive housing market in recorded history.”

But as July turns to August, reports suggest the rush of buyers missed many markets. Existing homes sales have fallen, compared to the same months last year, in four of the last five months. New U.S. home sales fell 5.3% in June to an eight-month low. It was the second drop in new-home sales in three months. June housing starts plunged 12.3%. Residential building permits issued in June dropped for the third consecutive month.

2018Housing Slowdown Existing SalesExisting homes sales have fallen year-over-year in four of the last five months. New U.S. home sales fell 5.3% in June to an eight-month low. It was the second drop in new-home sales in three months.“It’s alarming that single-family construction permit growth is decelerating, at a time when homeownership is rising and Millennials are reaching their peak age to really enter the market and buy their first home,” said Sam Khater, chief economist for Freddie Mac, in a statement about the Commerce Department’s June housing estimates. “The growing imbalance between demand and supply is the reason home prices continue to escalate.”

Home price growth has yet to be affected but the apparent weakening of demand suggests that the housing market may finally be cooling.

Housing inventory shortages have been a primary factor in rising home prices over the last three years. At the same time, skyrocketing building costs and the demographics of those who have money to spend in a period of declining wages has ensured a steady flow of expensive premium housing. Home prices have been rising at least twice as fast as incomes for the past four years.

“Home sales, new home construction and outlays for renovations and repairs were collectively a net drag on overall growth during the first half of the year, even as real GDP growth ramped up to a 4.1% pace during the second quarter,” according to special commentary on housing by the Wells Fargo Economics Group.

After nine years of U.S. economic growth, the housing industry is starting about 30% fewer single-family homes than the 1.3 million units that the National Association of Homebuilders calls a normal level of housing starts. The pace of multifamily starts has trended down since January.

“Higher lumber prices in light of tariffs on Canadian softwoodAtlanta Fed Wage Growth TrackerU.S. wage growth has slowed since November 2016 more steeply than it rose between November 2013 and 2016. Despite strong employment, wage growth has lagged economists’ expectations. After accounting for inflation, today’s average wage has about the same purchasing power it did 40 years ago.FEDERAL RESERVE BANK OF ATLANTAlumber and higher building material prices in general may be causing some builders to hold off on some projects, particularly starts of lower priced homes, which simply do not have enough profit margin in them to absorb these higher costs,” according to analysis by Wells Fargo Economics of the U.S. Commerce Department’s June monthly housing construction estimates. “Those higher costs are likely weighing even more heavily on apartment projects, which have seen permits tumble at an astounding 58.2% annual rate over the past three months.”

With prices already at all-time highs in most markets, rising interest rates exacerbate affordability problems. Rates were hovering below 4% going into 2018 but have since shot to as high as 4.6%.

Although it can vary market to market, these factors all point to housing affordability being pushed beyond what many people can pay. The clearest evidence is that months of supply for existing homes ticked up year-over-year in June for only the second time in three years. Given the total number of existing homes for sale has been falling, the uptick in months of supply is likely attributable to a slower pace of home sales.

In some markets, the increase in inventory is more pronounced. According to Realtor.com, active listings in July were up 44% year-over-year in San Jose, 29% in Seattle, 19% in Portland, 18% in San Diego, and 15% in Dallas.2018Housing Slowdown RatesInterest rates were below 4% going into 2018 but have since shot to as high as 4.6%. Prospects of rising rates pushes premium buyers to buy sooner, but can put off first-time buyers indefinitely.

Moody’s just released a positive outlook for the U.S. homebuilding sector, reflecting enthusiasm for fundamental business conditions overcoming housing headwinds over the next 12 to 18 months:

Momentum – key underlying drivers of housing demand, with homebuilding growth, now in year seven, and the overall economic expansion, now in year nine, show few signs of slowing.

Millennials – the biggest population cohort in the U.S. workforce is entering the housing market – both for purchases and for rentals – in powerful and increasing numbers.

Consolidation – homebuilders are finding it cheaper and quicker to enter new markets, and easier to go much deeper in existing markets, by buying competitors rather than “green fielding.”

Credit metrics – for much of the homebuilding industry, debt leverage is gradually being reduced, interest coverage is strengthening and recent declines in gross margins are slowing and even stopping.

It does appear U.S. economic fundamentals are little changed over the past few years. Those fundamentals have produced two-thirds of normal housing construction volume since the economy turned solidly up five years ago. Those aren’t laurels to rest on.

It’s possible the larger economy’s momentum and the direction of home buying might diverge, as this spring and summer have already seen a few months’ declines in home sales, home construction and permits issued. Home prices and mortgage rates continue to rise, and mortgage-interest deductions have been curtailed. These conditions are unfolding in an environment where U.S. wage growth has slowed since November 2016 more steeply than it rose between November 2013 and 2016.

Millennials should be doing a significant portion of home buying, given 20-somethings’ high potential for forming new households. Instead, they earn 20% less than the Baby Boomer generation did when they were in their 20s. And Millennials also have exponentially more student loan debt to repay than any other generation before. Inflated home prices and limited starter inventory are not in their favor.

I’m not an economist, so even if I wanted to make predictions, they wouldn’t be worth much. But here’s an early warning from somebody who knows: “Housing market activity – sales and construction – likely has peaked for this cycle,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, told clients after the Commerce Department’s release of June housing construction data this month.

Continue reading Reasons to Suspect the US Housing Market is Starting to Coo

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Home Prices Still Increasing Despite Fall In New Homes Sales

The skyline of Seattle. Credit: Getty Royalty Free

The report last week of a 13% fall in the number of new homes sold in September (compared to the previous September) was another bit of bad news behind the 10% fall in the S&P 500 so far in October. Homebuilder stocks are down nearly 40% from last January.

Looking at the graph below of Federal Reserve Economic Data (FRED), you can see new home sales have a strong tendency to fall a year or two before recessions begin, which helps explain why so many people are interested in following new home sales.

New One Family Home SalesSOURCE OF DATA: U.S. BUREAU OF THE CENSUS AND U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, RETRIEVED FROM FEDERAL RESERVE BANK OF ST. LOUIS. ANNOTATIONS BY JOHN WAKE.

The number of new homes sold began to fall a year or two before six out of the last seven recessions. (Home sales did not fall before the 2001 recession.) Looking at the graph again, you can see that new home sales did fall a few times without being followed by recessions—once in the 1960s, once in the 1980s and twice in the 1990s.

Case-Shiller Home Price Index

Now let’s switch from the new home market to the much larger existing home market and existing home price trends.

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One of the most closely followed statistics on the strength of the existing home market is the Case-Shiller Home Price Index, which released numbers today for August. The Case-Shiller numbers are not the most current, running about two months behind. But despite being slow, their “repeat sale” index is considered by many to be a better measure of home prices than median or average home prices. Average and median home prices, for example, are affected by the composition of the homes sold. If more luxury homes sell because the stock market is hot, that would increase the median and average home prices in a city even if home prices haven’t actually changed at all.

The latest Case-Shiller numbers show that home prices were still increasing in all 20 cities covered by the index and in the U.S. as a whole, but price increases were getting smaller.

Hot: Las Vegas home prices (up 13.9% in August compared to the previous August), San Francisco (up 10.6%) and Seattle (9.6%) had the highest annual home price appreciation in the 20 cities covered by Case-Shiller.

Cold: New York (up 2.8%) tied Washington D.C. (up 2.8%) for the least home price appreciation in the 20 cities. New York knocked Chicago (up 2.9%) out of the second worst spot.

Top and Bottom Two Case-Shiller Cities For Home Price AppreciationSOURCE OF DATA: S&P DOW JONES INDICES AND CORELOGIC. GRAPHIC BY JOHN WAKE.

Home Price Momentum

Las Vegas and San Francisco had by far the largest increases in home price momentum comparing their price increases the last 12 month to the previous 12 months.

Seattle’s price momentum slowed the most, down 3.6%, but Seattle still had a very high 9.6% appreciation rate over the last 12 months. Seattle led the country in home price appreciation from July 2016 through May 2018.

San Diego and Dallas were losing some upward momentum on prices but their home prices were still increasing at over 4% a year.

Overall, the U.S. home price momentum is essentially flat. U.S. home prices increased 5.8% in the last 12 months and 5.9% the previous 12 months. Half the 20 cities covered by Case-Shiller saw increasing price momentum and half saw decreasing home price momentum.

Case-Shiller Home Price Momentum For 20 CitiesSOURCE OF DATA: S&P DOW JONES INDICES AND CORELOGIC

The Case-Shiller existing home price index doesn’t show any red flags (yet) but, on the other hand, they say price is the last thing to change.

For more, here’s my discussion from last month on price deceleration and plateauing.

Continue reading Home Prices Still Increasing Despite Fall In New Homes Sales