Housing Affordability Causes Ongoing Weakness for Home Sales

Contracts for new, single-family home sales declined in October, falling 8.9% to a 544,000 seasonally adjusted annual rate according to estimates from the joint release of HUD and the Census Bureau. The decline came off an upwardly revised September estimate, which was increased from an initial reading of 553,000 to a new estimate of 597,000. The October estimate was the lowest annual pace since December 2016, a reminder that builders must manage costs as affordability concerns rise. While a solid economy and positive demographics support future demand for housing, it is critical to address the mounting affordability crisis.

Despite the disappointing October estimate, total sales for the first ten months of 2018 (532,000) were 2.8% higher than the comparable total for 2017 (518,000). We expect the volume of new home sales to continue to expand along the current modest pace, subject to monthly volatility and supply-side cost concerns. However, that growth will occur off a lower benchmark level due to a larger than expected market reaction to higher mortgage rates this summer and fall.

Inventory increased in October to 336,000 single-family homes for sale. The current months’ supply stands at a level of 7.4. This marks a somewhat elevated level of inventory, suggesting ongoing soft conditions for home construction in the near-term. However, favorable demographics and a healthy labor market point to long-term expansion.

Median new home sales price (price of a home in the middle of the distribution) decreased 3.6% in October to $309,700. Managing rising construction costs the months ahead will be a key challenge for the housing industry, as it will be increasingly difficult to pass along higher development costs to home buyers as rates rise.

For the first ten months of 2018 (and relative to the first ten months of 2017), new home sales were up 6.3% in the Midwest, 3.8% in the South, 4.1% in the West, and down 17.1% in the Northeast, due to some tax reform related effects and affordability.

 



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