May Gains for New Home Sales

Contracts for new home sales expanded by 2.9% in May to a 610,000 seasonally adjusted annual rate, according to estimates from the joint data release of HUD and the Census Bureau. The report also noted a strong upward revision for the April rate of sales, increasing from a 569,000 annual pace to 593,000. The growth in sales continues along a positive trend for the market, which is supported by solid job growth, improving household formations, continuing favorable housing affordability conditions and tight existing home inventory.

The three-month moving average of new home sales (616,000) is currently near a post-recession high (619,000). Despite some volatility in the month-to-month sales figures, May marks the third consecutive month that the three-month moving average has topped a 600,000 rate. New home sales through May are running 12.2% higher than this time in 2016, exactly in line with our forecast.

Inventory growth continued in May. After hovering near 240,000 for most of 2016, inventory has now risen to 268,000 homes. The current months’ supply stands at a healthier 5.3. Given tight existing inventory, more new homes are required to meet housing demand.

The most recent data also indicate a growing share of homes not-yet-started in builder inventory. For example, on a year-over-year basis, homes under construction in inventory have increased by 6% over the last year. Completed, ready-to-occupy homes (there are only 62,000) are up 5% since May 2016. In contrast, homes not-yet-started listed in inventory have increased 43%, from 37,000 in May of 2016 to 53,000 last month. Sales of homes not-started construction have also been rising. These factors are consistent with growing housing demand.

Pricing posted notable gains in May. Median new home sales price (price of the home in the middle of the distribution) rose to $345,800. Average home price jumped to $406,400. The data suggest these gains may be due to a shift in the geographic mix of new home sales in May, with a larger share of sales in high cost areas like the West.

Regionally, there was strong sales growth on a monthly basis in the West (13%) and the South (6%). Declines were reported in the Northeast (11%) and the Midwest (26%).

Solid builder confidence and ongoing tight inventory conditions point to continued growth for single-family construction in the months ahead. Pricing remains an open question, given rising construction prices and increasing interest rates. New homes will need to be competitively priced, even as prices for existing homes continue to grow. For this reason, we continue to expect a broadening of the new home inventory base and slight declines in median new home size. On the cost side, increases in lumber costs due to trade duties are yet another factor for builders to manage.



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