Eye on the Economy: New and Existing Home Sales Increase in February


Builders signed contracts on more homes last month than any time since early 2008, according to figures released by the Census Bureau and HUD. February seasonally adjusted annual new home sales topped out at a 539,000 annual pace, up 7.8% from a healthy 500,000 rate in January. In percentage terms, sales increased the most in the Northeast (153% over the January rate) due to prior weather-related declines. Inventories dropped slightly to 210,000, which with the increased sales rate, lowered the months’ supply measure to 4.7 months. Lower inventories suggests optimism about construction growth for the year ahead.

Although reporting smaller gains, existing home sales shook off winter-related declines in February as well. As reported by the National Association of Realtors, sales increased 1.2% in February (up 4.7% from a year earlier), and the share of sales for first-time buyers registered its first gain since last November. Supplies of existing homes for sale are also diminished, with the current inventory representing only a 4.6-month supply.

However, the lingering regional effects of the tough winter for the Eastern part of the U.S. were seen in disappointing construction data for February. The pace of housing starts fell 17% to its lowest level since January 2014.

The decline was across the board in building types and regions. Single-family starts were down 14.9% and multifamily starts fell 20.8%. Single-family starts decreased the most in the weather sensitive Northeast (-60.7%) and Midwest (-32.4%) but were also down in the less weather affected South (-5.9%) and West (-9.1%).

The declines mirror the NAHB/Wells Housing Market Index (HMI), which fell two points to 53 in March. The drop marked the third consecutive decrease in this measure of single-family builder confidence. However, the HMI has been above 50 since July of last year, suggesting that the outlook for construction growth is good, not great. Similarly, fourth-quarter market data from the Census Bureau and HUD Survey of Market Absorption of Apartments suggest ongoing strong rental demand and positive prospects for maintaining current levels of multifamily development.

Future construction growth in 2015 is also linked to potential movements in interest rates, for both mortgages and builder loans. Federal Reserve Chair Janet Yellen indicated that that the Fed was prepared to be “less patient, but not impatient” with respect to the timing of the first increase in interest rates, which analysts expect to happen later this year.

Key to that monetary policy strategy are measures of inflation. The Producer Price Index estimates from the BLS for February revealed a 0.5% decline. For builders, gypsum prices continue to rise (up 3.9% in February after a 4.3% increase in January), although lumber and wood product prices remain stable. In contrast, the Consumer Price Index rose 0.2% in February, but remains unchanged over the last year due in part to recent energy price declines. The energy index rose 1% in February, after seven consecutive monthly declines.

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