New home sales contracts expanded by 3.7% in January over a soft December reading, according to estimates from the joint data release of HUD and the Census Bureau. Despite the gain, which places the January pace of sales 5.5% higher than a year ago, the current seasonally adjusted annual rate of 555,000 is slightly below the positive growth trend that has been in place over the last few years.
Inventory growth continued in January. After hovering near 240,000 for most of 2016, inventory increased to 247,000 in October, 256,000 in December and 265,000 in January. The current months’ supply number stands at 5.7, higher than the existing market (3.6) estimate.
Solid builder confidence and ongoing tight inventory conditions suggest continued growth for single-family construction in the months ahead. An open question is pricing, 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.
The labor market is already tight, and now Trump is deporting the immigrants who build homes in record numbers. If new starts taper off, prices will keep going up, as well as the cost of construction. Profitability could stay roughly level with those offsetting market forces.
On the other hand home ownership rates will continue their 50 year decline and we may see a resurgence of the multi-family build-to-rent trend, and entry level properties realizing the most appreciation/reversionary benefit.
That’s what my foggy crystal ball says.