August 2013 New Home Sales Up 14.4 Percent Year-Over-Year, But Still Anemic

I am always surprised at how much attention the press pays to new home sales since, for every new home sale historically, there are five to six existing home sales. New home sales are the tail of the dog while existing home sales are the rest of the dog. Today, new home sales are even less—kind of like a bobbed-tail dog. Sales of new homes in August ran at a seasonally-adjusted annualized rate (SAAR) of 421,000 compared to 5.48 million existing homes sales (SAAR). The current level is 13 existing home sales for each new home sale. New home sales peaked at 1.295 million (on a 12-month moving average) in February 2006.

Builders have three headwinds impeding increased construction in today’s economic landscape. First is the lack of available, immediately buildable, quality lots. Since 2006 very few new residential developments have taken place, so lots are scarce. The second is the literal loss of a generation of skilled construction workers. Total residential dwelling permits peaked in 2005 at 2.148 million dwelling units, and plunged to 584,000 in 2009 – a drop of 75 percent. The third head wind is the increase in materials costs in recent years. See the change in construction related costs as reported by the Associated General Contractors of America at http://www.agc.org/galleries/news/PPI_Tables_201308.pdf

August new home sales were up 14.4 percent from a year ago, while the median price of new homes, at $254,600 was essentially unchanged compared to August 2012. On a 12-month moving average (which removes the monthly noise and better shows the trend), sales totaled 415,000 (up 19.9 percent year-over-year) with a corresponding median price of $249,400 (a gain of 10.4 percent from a year ago). The following graphs show the ‘raw’ data (SAAR) and the 12-month moving average of the SAAR.

9-27-13 graph1

9-27-13 graph2

The real story is in the price premium new homes are commanding in the market place when compared to existing homes. From 2001 through 2009, new homes sold on average for 9.4 percent more than existing homes. The new home premium hit 50 percent in February 2012, and has averaged 32.6 percent in the latest 12 months. The following graph shows the 12-month moving average sales prices for new and existing homes.

9-27-13 graph3

The bottom line is that new home sales are coming back, but the rate of recovery is akin to the pace of a snail. As time progresses and new lot development comes on line, I expect new home sales to again reach the 1 million annualized pace (the new normal). But that level may not be reached until 2016 or later.

Ted

Comments

  1. Anonymous

    Isn’t there a 4th headwind? Construction lending is much more restrictive than a few years ago. Banks require builders to have skin in the game as they will only lend 80% LTV and Banks will only allow them to build a few at a time.

    There are no national builders in the Midwest. Local builders can only build a few homes at a time due to lack of lots, and tight construction lending standards. While national builders might be able to ramp up production, it will be difficult for local builders to do the same.

    In the past, Midwest builders were only required to have construction knowledge, a clipboard, cell phone, and a pickup truck. Now they need cash, and a lot of it if they are going to increase production.

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