November 24, 2021

New home sales rose 0.4% in October to 745 thousand after having jumped 7.1% in September.  After hitting a peak of almost 1 million homes in January, home sales declined fairly steadily to the 700 thousand mark.  That drop in the pace of sales partly reflects an inability by some potential buyers to afford a new home.  But, more importantly, it also reflects an inability of builders to attract a sufficient number of new workers and deal with significant supply chain issues.    It also coincides with a pickup in the pace of COVID cases.  But the number of COVID cases has fallen rapidly since the beginning of September.  The pace of hiring picked up after Labor Day when the federal unemployment benefits expired, hence hiring in the construction sector has begin quicken, which means more homes will be available for sale.  That will produce a faster pace of home sales and some slowing in the extraordinarily rapid recent run-up in prices.  .  Sales should rebound as we move into the last couple of months of this year and on into 2022.

With a small increase in the number of homes available for sale, and little change in the pace of sales, the month’s supply of homes available for sale rose by 0.2 month to 6.2 months in October.  Once hiring picks up and more homes become available for sale, the pace of home sales will clearly be faster and, hopefully, the rate of price appreciation will be slower..

Home prices have been skyrocketing for months but may be showing some signs of slowing down.  New home prices rose 0.7% in October to a record $407,700 after having declined 0.7% in September.  This means that they have risen 17.5% in the past 12 months.  As new workers become available in the months ahead  and the pace of construction picks up, more homes will become available which should slow the rate of increase in prices.

With home prices rising rapidly one might think that housing affordability would be declining which is true but be careful.  Mortgage rates remain very low at 3.1%.  And consumer income is surging as the result of all these stimulus checks.  As a result, housing affordability index has fallen to 151 but that is still quite high.  At 151 it means that median-income earning consumers have 51% more income than is required to purchase a median-priced home.  Back at the peak of the housing boom this series stood at 114.  Housing was very expensive then.  But today it is quite affordable for most buyers despite the rapid increase in home prices.

Houses are still flying out the door.  The NAR indicates that the average existing home sells in just 18 days.  That is the shortest length of time between listing and sale ever.  For new homes the number of months on the market is 2.4 months which is a record short time period.  Any way you slice it homes are being sold quickly despite higher prices.

But that does not mean that housing remains affordable for everyone.  If one looks at the distribution of home sales by price between May of last year and June of this year, the percent of homes selling for $300,000 or less has fallen by 23 percentage points.  Those selling for $300,000-$400,000 thousand has declined 3%.  But homes selling at prices in excess of $400,000 have risen by 26%.  What this seems to suggest is that younger buyers who are perhaps purchasing their first home are getting shut out of the market.  So while housing remains very affordable for most buyers, younger first-time buyers are facing a problem.

.Look for new home sales to continue to climb to about 900 thousand by the end of 2022.

Stephen Slifer

NumberNomics

Charleston, SC