New Home Sales Wilt in the Heat of Summer in July 2017

New home sales unexpectedly fell 8.9 percent on a year-over-year basis in July 2017, now at an estimated 571,000 unit sales pace on a seasonally adjusted annualized rate (SAAR).  Sales dropped 9.4 percent sequentially from June’s 630,000 pace (SAAR).  Median new-home price was $313,700, up 6.3 percent versus the same month a year ago while average price at $371,200 was up 4.3 percent.  With an inventory of 276,000 new homes available for sale, there is now an estimated 5.8 months of supply compared to 4.0 months for existing homes.

New home sales are counted differently than existing home transactions.  An existing home sale is counted when the property actually closes and ownership transfers.   New home sales are counted when the contract is signed.  In some extreme circumstances for a counted new home sale, construction may not have yet commenced and that specific transaction may not close.  As a result, new home sales often have material revisions from one month to the next.

The following graph shows new home sales on a SAAR and monthly median price since January 2007.

8-25-17 graph1

The growth of the median price since 2014 is a function of both rising values and also the dearth of lower-amenity, smaller entry-level new housing construction.    Again,  repeated from last year:

Since the housing bubble implosion, builders continue to face three headwinds:

  • limited supply of new lots, with higher prices resulting in more upscale, larger, higher-amenity new-home construction
  • loss of a majority of the skilled-construction workforce as new home sales peaked at 1.424 million in October 2005 and plunged to just 278,000 by August 2010 – a decline of more than 80 percent
  • material increase in construction costs – labor and materials

As a result, the ratio between new and existing home median prices continues to diverge at an increasing rate.  From 2001 through 2006, the average new home median price was 10.9 percent greater than corresponding existing home price.   Since 2014, new home median prices have averaged 32.6 percent greater than existing homes.

New and existing home median prices are shown in the following graph commencing in 2001, prior to the start of the housing bubble.

8-25-17 graph2

Fannie Mae’s August 2017 forecast expects a 10.4 percent increase in new home sales from 2016 to 2017 and an 10.3 percent gain from 2017 to 2018.  The Mortgage Bankers Association August 2017 forecast shows new home sales rising 11.0 percent in 2017 year-over-year and 11.6 percent in 2018.

To read the entire Census Bureau news release on new home sales click https://www.census.gov/construction/nrs/pdf/newressales.pdf

New home supply continues to fall short of demand as the household formation rate hovers in the 1 to 1.2 million range.  As result, home prices continue to escalate in most markets across the U.S.

Ted

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