New Homes Sales Still Growing, Even With Higher Mortgage Rates

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Before we get into today’s new home sales report, I would like to kindly remind everyone that the monthly supply of inventory for new homes has been higher every month in this cycle,compared to the last one.

From Fred:
https://fred.stlouisfed.org/series/MSACSR

June 2018 Inventory new homes

Today, the Census Bureau reported that new home sales barely missed expectations of 677,000, coming in at 662,000.  The previous month’s numbers were revised downward but the trend for 2018 is still beating my expectations for the year.  New home sales are growing at 7.2% compared to last year. In the up coming months, we will see if the rate of growth slows due to higher mortgage rates. The current report shows an increase in inventory from last month. We have already seen a 6-month inventory print this year. If we break above 6.5 months of inventory this year, then this would support a thesis that weaker demand is leading to higher supply, but that isn’t the case so far.

For 2018, I predicted new home sales would be up 2%-5% this year and as of now the market is beating my expectations.

” I expect to see 2%-5% growth in new home sales that could go higher if the median sales price remains stable and the trend of building smaller homes continues. ” 

https://loganmohtashami.com/2017/12/31/2018-economic-housing-predictions/

From Census: 
https://www.census.gov/construction/nrs/pdf/newressales.pdf

New Home Sales:

Sales of new single-family houses in April 2018 were at a seasonally adjusted annual rate of 662,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.5 percent (±11.8 percent)* below the revised March rate of 672,000, but is 11.6 percent (±23.7 percent)* above the April 2017 estimate of 593,000.

Sales Price:

The median sales price of new houses sold in April 2018 was $312,400. The average sales price was
$407,300.

For Sale Inventory and Months’ Supply:

The seasonally-adjusted estimate of new houses for sale at the end of April was 300,000. This represents a
supply of 5.4 months at the current sales rate

New home sales are still low. The claims of “record breaking demand” are greatly exaggerated and this is why the builders aren’t building more homes. In fact, the significant year over year growth in housing starts this year is coming from the multifamily sector.

More on the recent housing starts data here.

https://loganmohtashami.com/2018/05/16/slow-steady-a-housing-starts-affair/

A more perspective look at new home sales below.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2018/05/23/new-home-sales-down-1-5-in-april

June Home Sales adj pop

As you can see below, the adjusted to inflation median home price rate of growth is cooling which suggests there may be a wider spread of home prices (i.e. more lower priced homes in the sales mix). A higher amount of  smaller priced new homes is needed if we want to see more growth in this sector.

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Purchase applications, which track with existing home sales, have shown positive year over year growth every single week this year.  The purchase application number is less important now compared to the heat months starting from the 2nd week of January to the first week of May. I am still expecting flat to negative growth in existing home sales this year, even with higher purchase applications, because the number of cash buyers, as a percentage of total sales, are falling. The big take away from this report is that there is modest growth in purchase applications, in the range of 1% -11% this year, unlike the housing demand seen in 2013/2014 where application were down 20% year over year. Real growth in this sector would be 25% + growth, year over year, like we saw in 2016.  We will need more mortgage demand in order to off-set the in demand due to fewer cash buyers. Currently, we are still at 1998 levels for mortgage demand based on the purchase application data, even with the longest job expansion on record, over 155,000,000 people working, mortgage rates under 5% since early 2011 and soon to be the longest economic expansion every recorded in U.S. history.  I stay true to my demographic timeline –the housing sector will not greatly improve until the years 2020-2024. In that time frame, you should see purchase application date breach into the 21st century and housing starts finally reach 1,500,000.

From Calculated Risk:
http://www.calculatedriskblog.com/2018/05/mba-mortgage-applications-decrease-in_23.html

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Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing marketLogan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami

About Logan Mohtashami:

https://loganmohtashami.com/about/