New Home Sales Rise, But Only In The South

Sales of new single-family homes rose by 6.7 percent in May to reach a seasonally adjusted annual rate of 689,000 according to a report released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. A downward revision to the sales pace in April, from 662,000 to 646,000, partly contributed to the increase in sales.

Regionally, sales rose over the month in the South, by 17.9 percent. Meanwhile, sales of new homes fell in the Northeast and the West, by 10.0 percent and 8.7 percent respectively while sales in the Midwest were unchanged. Sales in the South accounted for 55 percent of all new home sales over 2017. However, in three of the four regions, the Midwest, the South and the West, new home sales in 2018 is ahead of its trend over the same period in 2017. Nationwide, sales of new homes over the first five months of 2018 are 8.8 percent ahead of the number of sales over the first five months of 2017.

The release indicates that sales of new homes remain closer to their post-recession high of 712,000 reached in November 2017. The figure below illustrates that the pace of the recovery in new home sales parallels the trend in the inventory of new homes. Historically, sales of new homes track inventory. However, over the 10-year period between 1996 and 2005, sales of new homes consistently exceeded inventory.

Following its peak in 2005 sales of new homes began to decline and inventory quickly followed. The sustained recovery in new home sales, which began in 2012, preceded the inflection and sustained increase in inventory, but since turning upward, inventory of new homes for sale has closely tracked new home sales.

The NAHB/Wells Fargo Housing Market Index (HMI) captures single-family builder sentiment response to home sales. The figure below illustrates that each component of the HMI, single-family sales in the present, single-family sales over the next 6 months, and traffic of prospective buyers, has contributed to the recovery in builders’ sentiment. Although feelings about both current sales and expected sales exceed that of prospective buyer traffic, all three sub-indexes are currently at or above 50.

Taken together, job growth and expanding housing equity are likely contributing to the pace of new home sales. At the same time reports of millennials (re-) entering the homebuying market are consistent with one of the sources underlying the rising homeownership rate.

Healthier demand-side fundamentals should support continued sales growth, which, in turn, should be observed and interpreted optimistically (headline HMI readings above 50) by builders, although the trend in builder sentiment of prospective buyers currently sits at 50. Overall builder optimism should then translate into continued growth of single-family production. However, the translation of builder sentiment to single-family starts may be constrained to a degree by the challenges, most notably lumber prices, that builders face.



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