Eye on the Economy: New Home Sales Jump in August


New home sales rebounded in August, increasing 18% to a seasonally adjusted annual rate of 504,000, according to estimates from the Census Bureau and HUD. These gains were atop upward revisions for the July pace. The August rate is 33% higher than August 2013 and is a solid indication of the ongoing recovery in the single-family market.

The inventory of new single-family homes inched up to 206,000 on a non-seasonally adjusted basis in August. Of this total, only 48,000 were completed, ready-to-occupy residences. In terms of months’ supply, the inventory of new single-family sales fell to 4.8 months.

Conditions remain positive for sales of new homes, as mortgage interest rates remain historically low. According to data from the Federal Housing Finance Agency, the average effective interest for new home sales was 4.25% in August. Rates have remained in this range since rising in late 2013.

New home sales matter to the larger economy due to the economic benefits of home building. For example, for the second quarter of the year, housing’s share of GDP was 15.5%, with 3.1 percentage points of this total due to residential construction (home building and remodeling). Overall GDP growth for the second quarter rebounded from a dismal first quarter to 4.6% growth, according to estimates from the Bureau of Economic Analysis. Home building and remodeling added 0.27 percentage points to the headline growth estimate.

Census reported construction spending declined slightly (0.1%) in August, due to ongoing weakness in the remodeling sector that is attributable to year-over-year declines in existing home sales and the expiration of a energy-efficient remodeling tax credit. Single-family spending increased 0.7% for the month, while multifamily was up 1.4%.

The recent positive news for the new home market contrasted with declines in the existing homes sector. August existing homes sales, as reported by the National Association of Realtors (NAR), was off 1.8% for the month and down 5.3% year over year. Pending sales, also reported by NAR, fell 1% in August, suggesting reduced levels of closings in the coming months. Both declines appear to be connected to some withdrawals of investor and cash home buyers.

Rising home prices are one reason for these exits. The most recent Case-Shiller national index was up 5.6% (year over year) in August, the 27th consecutive month of increase. Over the last two years, home prices have risen almost 21%. These gains have been a net positive for household balance sheets, with the value of owner-occupied real estate reaching $20.2 trillion in the second quarter.

For state and local property governments, the gains in home value have resulted in increases in property tax revenue, which reached a $493 billion annual rate for all property sources for the second quarter. Property taxes currently make up 40.3% of state and local tax receipts from major sources.

However, housing price increases have hurt affordability for younger buyers and reduced potential yields for investor purchasers. It appears that home price increases will slow over the coming quarters, which will be a positive for first-time buyers. Income growth among younger, potential buyers will also be key.

Recent data from the Current Population Survey suggests that after years of decline, workers under age 35 realized income gains in 2013. Compared to 2012, when this group experienced an almost 1% drop in median income, last year this age group realized a 1.1% increase. Income gains will be critical for accumulating downpayments and qualifying for mortgages, as surveys continue to show that homeownership remains an important goal of Millennials, even if home buying, marriage and other traditional objectives are being delayed.

Recent data indicate mixed readings on consumer confidence. The Thomson Reuters/University of Michigan consumer sentiment measure was up in September, while the Conference Board Consumer Confidence Index declined due to concerns about current and future employment conditions. Job and income gains are necessary to continue the ongoing housing recovery.


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