New Home Sales: A Pleasant Surprise

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New Home Sales: A Pleasant Surprise
October 31, 2017

An Unexpected Increase

The housing market received an unexpected surprise as new home sales rose to an annually adjusted rate of 667,000 homes in September 2017, far exceeding the slight decline predicted by experts. September's new home sales value was the highest in ten years, and the 18.9% jump was the largest monthly increase since January of 1992.

However, there's another significance to the September value – it finally brings new home sales across the historical average of just over 650,000, the first time it surpassed that mark since the middle of 2007.

September's new housing numbers may be inflated because of the rarity of two hurricanes affecting America within such a short time period. New housing numbers are a reflection of contract signings, so it's possible that those displaced by Hurricanes Harvey and Irma who could afford a new home are causing a one-time surge in new home purchases. Over two-thirds of the new homes that were sold last month are in the construction phase or simply under contract and yet to be started.

It's Still An Unbalanced Market

There's another factor that may be driving new home sales – the even greater shortage of existing ones. Generally, a six-month supply of available homes represents a balanced market. At current sales rates, America has a five-month supply of new homes and a 4.2-month supply of existing homes. It's possible that homeowners are frustrated by an inability to find an existing home that they want and have simply decided to have one built instead.

Unfortunately, that doesn't help the entry-level homebuyer, since the new housing market is skewed toward higher-priced homes. The median home price for new homes in September was $319,700, compared to $245,100 for existing homes.

When the supply of starter homes is limited in the existing home market, as they currently are, it's difficult for a first-time homebuyer to be able to enter the market at all. Consider that in September, 19,000 homes sold for $500,000 or above, but only 13,000 sold for $200,000 or less.

Developers tend to target higher-end housing through standard economic forces. Higher land costs, regulatory burdens, and other material costs make it difficult for developers to make money developing affordable starter homes. Developers are also hampered by a shortage of skilled homebuilding labor that delays projects and drives up costs.

As the economy continues to improve, demand is likely to increase in all market segments. Will developers be able to keep up? According to a survey by the National Association of Home Builders (NAHB), their outlook is the best that it has been since May – but that doesn't mean they can produce enough homes to meet collective demand.

Lawrence Yun, Chief Economist at the National Association of Realtors, expects the supply of available homes to stay low for another year, citing developers’ concerns as well as rising borrowing costs and the fact that a large number of starter homes are tied up in the rental market.

A New Normal?

Perhaps we shouldn't expect developers to be able to keep up with demand any more. According to data from the St. Louis Federal Reserve, the supply of homes in the US has only topped a six-month supply once since September 2011 (a 6.1-month supply in July 2014). There was a similar period of low housing supply between April 1996 and April 2006 – a ten-year stretch where most months hovered around a four-month supply. Between those two time periods, the housing crisis and subsequent recession created a housing surplus that lasted a bit over five years.

The new normal may be a housing market mostly constrained by a lack of supply and a mismatch between the existing supply and demand. Increased government assistance could help to relieve this imbalance, but, under this administration and Congress, that seems highly unlikely.

To bring the market back into full balance, starter homes must be freed up in either the new or the existing market. There's not much of a driving force to make that happen in the short term; therefore, the housing supply is likely to remain short and mismatched to demand.

We expect October's new housing numbers to come down to earth – but we'll take the short-term positive news. September's new home sales figures may be a surprising anomaly, but at least it's a positive one.

The Takeaway

While an increase in new home sales is a good sign for the housing market, it's only one data point. If the pattern of the last six years holds, the market will continue to fluctuate around the trend line of a slow increase.

If you are in the market for a new home, the local trend is more important than the national trend. The key is to keep tabs on your local market within your price range and keep your finances in order so you can take advantage of the moment when your dream home is available at the right price. Accumulate as high of a down payment as you can, control your spending, and keep your credit score high. You can check your credit score and read your credit report for free within minutes with Credit Manager by MoneyTips. It's especially important that you do so if you are a first-time homebuyer looking for a starter home.

Even in the worst months for the housing market, people still buy homes. Don’t be afraid to buck the trend if a good opportunity presents itself. MoneyTips is happy to help you get free mortgage quotes from top lenders.

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