New Home Sales: 2015 Report Card

PROFILE PIC

The  Census  Bureau reported new home sales were 495,000, last month, a  slight miss from estimates. Headline numbers for new home sales are very volatile. In the last 4-6 months, especially, there were negative revisions and previous month’s  numbers were revised to 40,000 sales lower than the numbers originally booked.

Report : http://www.census.gov/construction/nrs/pdf/newressales.pdf

 

I made public my 2015 prediction for what new homes sales would be in 2015 in an article last December:

For the new home sector – I predict a replay of what we saw last year with a conservative estimate of 8% growth to an aggressive estimate of 12% growth. Other “expert soothsays” are predicting an over 25% increase in new homes sales in 2015, because demographics show a buildup in the need for homes. However, the Median Income to Median Home Prices (MI2MP) metric shows that new homes are more expensive than ever and therefore only an option for the wealthy buyer. If builders decided to provide some real incentives and discounts for their products, it is possible they could increase sales dramatically in 2015, capturing more of the “average buyers” – but the discounts and incentives would need to be significant before new homes could compete with the existing home market – and this would mean lower margins – a trade-off I don’t believe the builders are willing to make.

All other housing analysts of which I am aware, gave growth estimates of 24%-41% for  2015 new home sales.  It was never clear to me where that much growth was going to come from. Even though interest rates were lower this year, that type sales growth from a sector that is 90% mortgage dependent, would need homes at lower price points to attract more buyers.

With the year nearly over, we can safely say that we will  never achieve  20%+ growth  in new home sales this year.  We  are now at 15.7% growth and even if we get another bad headline number, with negative revisions from the last 2 reports of the year, new home sale growth will still be in between 11%-15%.  The reality is that new homes sales have been soft and missed predictions for growth for  3 straight years in row, all after the Taper Tantrum spike in mortgage rates in mid 2013.

 

In my 2015 Housing Prediction article, I also wrote the following about the inflated predictions of other analysts.  

The bar for housing is so low that some housing bulls might try the predictable tactic of bellowing about exponential growth portending a miraculous recovery when all that is occurring is a bump up from a pitifully low base. I take a more measured (or perhaps jaundiced) view of what the future holds.

 
The constant drum beat in the media of terms like “the housing market in strong” and words such as “ballistic” were used to talk about the year over year growth expected for 2015.  However, rarely was it mentioned  that we had a very low bar to work from.  Saying the housing market is on a slow and steady pace upward just isn’t sexy enough I suppose.

Data from Doug Short provides a perspective on just how soft  new home demand was in 2015:

“New single-family home sales are about 16% below the 1963 start of this data series. The population-adjusted version is 51% below the first 1963 sales and at a level similar to the lows we saw during the double-dip recession in the early 1980s, a time when 30-year mortgage rates peaked above 18%. Today’s 30-year rate is around 4″

http://www.advisorperspectives.com/dshort/updates/New-Home-Sales

DECEMBER NEW HOME SALES

In terms of the year over year growth, last year’s new home sales were 20%-30% lower than most estimates.  Even my more cautious 8%-12% sales growth prediction was too high.  Year over year growth in sales was roughly 2%.  We were destined to see some growth in 2015 as we were entering the 7th year of expansion in the economic cycle and were comparing to a low level of  437K from 2014.   2015 sales stated off hot but when rates moved from 3.625% to  4.125%, sales decelerated and since then revisions have come in negative.

From Calculated Risk:
http://www.calculatedriskblog.com/2015/11/new-home-sales-increased-to-495000.html

DECEMBER CAL NEW HOME SALES

The trend of revisions are key for understanding what to expect in new homes sales in the coming months.   Revisions have been negative in the last few months.   I discussed this trend this summer when I noticed only a few people were picking up on the decelerating growth. The chart above has had many negative revisions to it from previous months.

https://loganmohtashami.com/2015/08/19/new-home-sales-need-a-strong-total-report/

 

The chart below from Political Calculations shows that on a nominal basis, median new home prices are well above the peak of the housing bubble. If we adjusted to inflation, I believe it’s roughly 1% above the bubble peak.  Still, both metrics show massive housing inflation. This is partly due to larger homes being sold more often in this cycle making the median price explode higher.

From Political Calculations :

http://politicalcalculations.blogspot.com/2015/09/building-more-affordable-homes-and.html#.VmMPqXarSUk

MI2MP 2015

The median new home sales price has been flat in 2015, and this could be a positive sign for 2016 sales for 1 major reason:

A flat median home sale price indicates that there were more lower end, smaller homes being sold in the mix in 2015, instead of more larger more expensive homes.  In order for new home sales numbers to grow, more lower end homes need to be offered and sold.  The builders got themselves in trouble by the mass production of bigger and bigger homes which were not affordable for most buyers.  In 2016 and beyond, builders will need to get more affordable units  into the market place.  I haven’t  been bullish on builders like  Toll Brothers  (TOL) for some time, compared to other builders, because they have limited their new home offerings to the very high end.  Note that their stock price hasn’t risen from early 2013 levels, something I mentioned on CNBC. At best,  Toll Brothers (TOL) is a under performing  stock and needs to catch up with other better performing builders such as Lennar (LEN)

TOLL BROTHERS

It’s simple. In order to increase new home sales, builders need to provide a product that the majority of  the population in the market for a home, can afford. Existing homes, which provide the inventory that competes with new homes, are offered at a big discount, comparatively.

If I were to assign a classroom grade to the 2015  new home sales numbers,  it would get a slightly higher grade of 84%, compared to what I gave for existing home sales in my previous article, which with was (83%).

I was looking for 8%-12% sales growth with room for more growth if median home prices fell.  The median price was flat, which means more lower-end homes were in the sales mix, not that there were discounts on the higher end homes.

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1988 and is in a partnership with ZeneHome.com