Eye On Housing
Sales of new homes fell by 1.5 percent over the month of April to a seasonally adjusted annual rate of 662,000. According to the report released by the Census Bureau and the Department of Housing and Urban Development, the small monthly decline partly reflected a downward revision to the estimate of new home sales in March from 694,000 to 672,000. Alternately, the monthly decline in April was concentrated in the West region, -15,000 (-8 percent), which represented a partial return of the strong gains in March, +24,000 (+14 percent).
Despite the decline over the month, sales of new homes rose on a year-over-year basis, and remain near post-recession highs. Each region of the country recorded a 12-month increase in April 2018. In addition, builders remain optimistic about future sales as both their expectations of sales over the next six months and their assessment of foot traffic from prospective buyers remains elevated. Recent trends in household formation indicate a switch from renter- to owner-occupied households supported by a modest increase in the homeownership rate of households under 35. However, the challenges faced by builders are a key headwind to the ongoing recovery.
Despite the decline in new home sales, analysis of builders’ sentiment suggests that sales should continue to grow. Overall, builders’ sentiment, as captured by the NAHB/Wells Fargo Housing Market Index (HMI), indicates that builders are optimistic. All three components of the HMI are above 50. Of particular note, both builders’ expectations of sales over the next 6 months and traffic of prospective buyers registered readings above 50, 77 and 51 respectively.
In addition, formation of owner-occupied households rose over the first quarter of 2018, continuing a trend that began in 2015. Although the homeownership rate remained unchanged over the quarter at 64.2 percent, demographic analysis indicates that the sideways movement reflected an increase in the homeownership rates of younger households. Meanwhile, the homeownership rates of households above the age of 55 ticked down.
However, the ongoing recovery of new home sales since its recession-related depths reflects an expansion in sales of new homes priced above $200,000. In contrast, prices of new homes below this threshold continue to fall. In the most recent release, sales of new homes priced under $200,000 were flat on a not seasonally adjusted basis. The downward trend in sales of new homes below $200,000 began prior to the housing bust. However, the continued decline in sales of homes within this price range following the recession may also reflect the challenges builders face, labor, lots, and lumber. These headwinds would put upward pressure on new home prices, aggravating competitiveness. For example, NAHB analysis has found that the recent climb in lumber prices has increased the price of an average single-family home by more than $7,000.
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