November 23, 2022

New home sales rose 7.5% in October to 632 thousand after having fallen 11.0% in September.  Home sales have been jumpy the past several months.  Having said that, the combined impact of a sharp rise in mortgage rates and rapid price appreciation has triggered a sharp drop in the pace of new home sales since the beginning of the tear.

With a small increase in the number of homes available for sale, and a bigger increase in the pace of sales, the month’s supply of homes available for sale fell 0.5 month to 8.9 months in October.  There are more homes being finished which have not yet been sold.  The increase in the inventory of homes available should lead to actual price cuts in the months ahead.

Despite the weakness in sales, home prices rose 8.2% in October after having risen 3.2% in September.  This series tends to be quite volatile on a monthly basis.  Over the past year new home prices have risen 15.4%.  But just a few months ago that year-over-year increase in home prices was in excess of 25%.  Clearly the rate of increase of home prices has slowed, and given the big jump in the months supply of homes available in recent months we should probably see home price cuts between now and yearend.  all other series on home prices like the Case Shiller Index and existing home sales have begun what will undoubtedly be a lengthy series of monthly declines.

With home prices rising rapidly and mortgage rates climbing, housing affordability has declined.  It has dropped from about 175 earlier in the year to 96.6.  At 96.6 it means that median-income earning consumers have 96.6% of the income required to purchase a median-priced home.  As mortgage rates rise slowly in the months ahead but home prices decline fairly quickly, the affordability index should actually increase to about 110 by year of next year which means that the median income earning family has about 10% more income than is required to qualify for the purchase of a median-priced home.  As prices fall and  housing becomes somewhat more affordable, new sales should be near their bottom.

Everybody has been expecting emerging weakness in housing  and home sales have fallen sharply.  The NAR indicates that the average existing home sells in just 21 days.  That is a near-record short length of time between listing and sale.  For new homes the number of months on the market is 1.6 months which is also close to a record short time period. A correctly priced home still seems to sell quickly.

Look for new home sales to be relatively unchanged from now through the end of 2022,  but relatively rapid price cuts in the months ahead should push them somewhat higher next year.

Stephen Slifer


Charleston, SC