New-Home Sales In Seasonal Decline?

The Mortgage Corner

Sales of newly built, single-family homes fell 7 percent to a seasonally adjusted annual rate of 414,000 units in December, according to newly released figures from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Despite the monthly drop, home sales in 2013 were up 16.4 percent over the previous year.  But several factors seem to be slowing down new-home sales.

This is while November sales were revised down from 464 thousand to 445 thousand, and October sales were revised down from 474 thousand to 463 thousand, raising fears that rising interest rates were crimping new-home sales. But prices were still rising. So this probably meant that new homes were becoming less affordable, maybe the reason for slower sales.

Graph: Calculated Risk

"December's decline in new-home sales follows elevated levels in the previous two months and means the fourth quarter was still much stronger than the third," said Rick Judson, chairman of the National Association of Home Builders (NAHB). "While we expect sales to gain strength in 2014, builders still face considerable constraints, including tight credit conditions for home buyers, and a limited supply of labor and buildable lots."

"Consumers are getting used to more realistic mortgage rates, which still remain favorable on a historical basis," said NAHB Chief Economist David Crowe. "As household formations and pent-up demand continue to emerge, we anticipate that 2014 will be a strong year for housing."

Regionally, new-home sales activity fell 36.4 percent in the weather-battered Northeast, 7.3 percent in the South and 8.8 percent in the West. The Midwest posted a gain of 17.6 percent. So much of the sales’ decline could also be due to the polar vortex and other abnormal weather factors.

And then we have the problem of lower inventories, as builders aren’t completing new homes fast enough. The inventory of new homes fell to 171,000 units in February, which is a five-month supply at the current sales pace. Although this is an increase over the previous month, it is due to the slower sales pace in December.

The good news is that the National Association of Realtors (NAR) had reported there were 5.09 million existing-home sales for all of 2013, which is 9.1 percent higher than 2012. It was the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom, and is now back to the 2000 sales rate at the beginning of the housing bubble, but existing-home inventories have declined there, also.

Total existing-home inventories at the end of December fell 9.3 percent to 1.86 million existing homes available for sale, which represents a 4.6-month supply at the current sales pace, down from 5.1 months in November. This will create even more demand for new-homes.

Graph: Calculated Risk

So there is still a huge gap between new and existing-home sales, which should mean that with housing starts rising above 900,000 in 2013, new-home sales have to increase substantially this year.

The biggest question left, other than the effects of rising interest rates and low inventories on sales, is whether household formation will recover. Housing economists and the U.S. Census Bureau predict more than 1 million new households per year will be formed over the next 10 years, at least, says the 2013 Harvard Joint Center For Housing Studies report. After holding near 600,000 for the previous five years, household growth picked up to almost 1.0 million in 2012. Stronger immigration helped to boost the pace of growth, with the foreign-born population registering its largest increase since 2008.

Based on the Census Bureau’s latest population projections and recent estimates of headship rates, demographic drivers support household growth of approximately 1.2 million a year over the remainder of the decade—similar to the rates in the 1990s as well as in the years preceding the Great Recession. And that should further boost sales, as 50 percent of new households usually buy a home, according to past history.

Interest rates will also play a big part on home sales this year, but probably not rise much above current rates, even with higher economic growth. This is in large part because incomes are rising just 2 percent per year, after inflation. It makes both new and existing homes much less affordable. The 30-year conforming fixed rate has declined of late, and is averaging 4.0 percent in California for a 0.5 point origination fee, and high-balance 30-year conforming is averaging 4.125 percent for a 1 point origination fee, but that is still higher than earlier in the year.

And with both Fannie Mae and Freddie Mac charging higher fees, and imposing stricter qualification requirements, results are still out on whether current sales’ rates can be maintained.

Harlan Green © 2014

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