Sales of New Homes Spike
In contrast to January’s decline in sales of existing homes, sales of new single-family homes actually increased in the month, by 7.9%, to an annual rate of 764,000 units. This is the biggest month-to-month percentage jump in new homes sales since last June, when they were up by a significantly larger 22%.
Compared to last year, January sales were 18.6% higher, reflecting the strong positive trend in sales in over the year. This is illustrated in the chart below, where the blue line captures the underlying trend that balances the monthly ups and downs in the data.
January’s pace of activity has not been seen in more than a decade. In fact, the last time monthly sales were at a higher pace was mid-2007. Naturally, this increased level of sales activity bodes well for NKBA members, as demand for products increases.
But on a more localized basis, not all regions contributed to the robust gains on the national level. Single-family home sales in the West, the second largest region, accounting for one-third of total U.S. sales, rose by 25% to an annual rate of 252,000 units. They also were 50% higher than in January 2019.
The other two regions with increasing sales, the Northeast and the Midwest, account for fewer than one in five sales in the nation (19%).
But it is sales in the South — the largest region, accounting for nearly half of U.S. total home sales — the are difficult to explain. Single-family home sales in the South fell by 4.4% in January, following a string of monthly declines in each of the preceding three months.
Were it not for the strong sales performance in the West, total new-home sales in the nation would have started the year on a negative note.
Along with increased sales, median and average home prices increased in January, both rising approximately the same rate. The U.S. median price for a new single-family home rose by 7.4% to $325,000, while the average (mean) price had a slightly higher increase of 7.8%, to $402,000.
Compared to January 2019, the median price is 14% higher, while the average is up slightly less, by 11.4%.
Regionally, the highest prices are in the Northeast, which includes wealthy and high-priced areas such as New York, Massachusetts and New Jersey. Conversely, the lowest house prices are in the Midwest and South regions which, curiously, have nearly identical average prices.
Case-Shiller Home Price Index Shows Overall House Prices Up
It’s important to note that the house prices discussed in this section are for existing homes only, they are different from the prices mentioned above, which reflect the sales price for new single-family homes. The Case-Shiller Home Price Index attempts to measure the general appreciation in the value of all existing homes in the U.S.
The December update to the Case-Shiller Index was released last week, and it reveals that house prices were 3.8% higher than in the previous year; this is higher than the increase seen in November, when prices were 3.5% higher than the prior year. Despite this gain, the pace of house price inflation is more moderate than it was two years ago, when prices were rising at an annual rate of 6.2%.
As illustrated in the chart below, the pace of price increases has been rising since the middle of last year. The chart captures the annual price inflation rate over the last two years.
Changes in house prices, like a number of economic events, impact people in different ways. Home sellers naturally benefit from higher prices, since they are getting a bigger return on their initial investment. Conversely, potential home buyers face the possibility of not being able to purchase the home they desire because now it might out of their price range, or they may be forced to carry higher monthly payments for the house.
But for all households that currently own a home, higher prices implicitly mean that the equity in their homes has increased; they are wealthier, at least on paper. And many of them take advantage to withdraw some of this equity via second mortgages or equity loans.
Condominium Prices Appreciate at a Slower Pace
The sale price of condominiums, on the other hand, has increased less rapidly than that for all single-family homes. The Case-Shiller index provides price data for condominiums only for five large metropolitan areas, four of which are shown in the graphs below. They reveal that condo prices have barely increased over the last year, rising around 1%, with the exception of Boston where prices are 2.6% higher than a year ago.
Also, note that in three of the areas, condo prices not only stopped increasing, but actually fell, as denoted by the dashed horizontal lines in the charts below. More notable is the case of the New York metro area, where condominium pries have been falling steadily for a year now.
Condo prices in Los Angeles and San Francisco were actually falling around the middle of last year, but began to recover over the last two to three months.
Although the Case-Shiller data does not provide explanations for prices rising or falling, speculation is that the Federal tax changes implemented in 2017 had an impact. That act limited the amount of property taxes that homeowners could deduct on their federal taxes. Prior to the 2017 tax law, homeowners could deduct the total amount of property taxes they paid, but the new law limited the deduction to the first $10,000 in property taxes.
Mortgage Rates Expected to Slide Further
Last week, mortgage rates were down, with the 30-year fixed rate falling to 3.45%, a minimal decline from the prior week. Given the collapse in the stock markets, however, and the virtual closing of production in China, additional declines should be expected in the near term, as investors move funds away from stocks into bonds and government securities. As demand for bonds and securities increases their price goes up and, consequently, their yield goes down. The yield is dimply the effective interest that holders of bonds will receive, and which translates into all types of credit instruments including mortgage loans.
Even though there has been political pressure on the Federal Reserve Bank to take some action, the Fed chairman has so far resisted those calls. There is little monetary policy can do, given the nature of the problems caused by the Coronavirus crisis. The problems arise from shutting down factories, and the slowdown or stopping the flow of products globally. Lowering interest rates or adding liquidity to the system does not address the crux of the problem.
Manuel Gutierrez, Consulting Economist to NKBA
Explanation of NKBA’s Economic Indicators Dashboard
The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.
Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.
Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.
Single-Family Starts. This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.
Existing-Home Sales. These data are issued monthly by the National Association of Realtors and capture the number of existing homes that were sold in the previous month.
High-End Home Sales. This series are sales of new homes priced at $500,000 and higher. The data are released quarterly by the U.S. Department of Commerce and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.
Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.
Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.
Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.
Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers.
We hope you find this dashboard useful as a general guide to the state of our industry. Please contact us at Feedback@nkba.org if you would like to see further detail.