July 24, 2019

New home sales jumped 7.0% in June to 646 thousand after having fallen 8.2% in May.  New home sales are always volatile so we prefer to look at the 3-month average pace of new home sales which is now 636 thousand.  Over the past year new home sales have risen 4.5%.   Despite  monthly wiggles the housing sector is responding nicely to lower mortgage rates and continuing gains in jobs and income.

The National Association of Realtors publishes a series on housing affordability for existing homes which stood at about 150.0 in May.   This means that consumers have 50.0% more income than is necessary to purchase a median priced existing home.   It is important to remember that consumer income continues to climb.  Jobs are being created at a pace of about 180 thousand per month and hourly earnings are accelerating.  Those two factors boost income.  At the same time home prices are now slowing and mortgage rates have fallen dramatically.  Thus, consumer paychecks are getting fatter and they can more easily afford a new home today that they were just a couple of months ago.  We believe strongly that housing is affordable and sales will continue to rise slowly in the months ahead.

New home prices rose 2.3% in June to $310,400 after having declined 10.0% in May.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices which is $317,000.  During the course of this past year prices have fallen 0.1%.  Lower prices will provide considerable stimulus to the pace of home sales in the months ahead.

At the same time mortgage rates have fallen from almost 5.0% to 3.8%.  That, too, should help sales rebound.

Having said all that, builders  are having a hard time finding an adequate supply of both skilled and unskilled workers.  Construction employment is rising by about 20 thousand per month.  Builders would like to step up the pace of construction, but it is difficult for them to do so given the scarcity of workers.

Between lower prices and lower mortgage rates, we believe new home sales should continue to climb slowly  in the months ahead.  We expect the sales pace to rise 19.0% this year to 690 thousand.  That sounds like a big increase, but home sales are already at 646 thousand.  They do not have much farther to go.

Stephen Slifer

NumberNomics

Charleston, SC